Edited version of private advice

Authorisation Number: 1051662505730

Date of advice: 29 May 2020

Ruling

Subject: Goods and services tax and Property

Question 1

Will Entity A make a taxable supply of Development Rights to Entity B in return for the Development Rights Fee of $X, pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

Does Entity B make a taxable supply of Entity B Replacement Services to Entity A in return for a $X Per Site Fee pursuant to section 9-5 of the GST Act?

Answer

Yes

Question 3

Does Entity B make a taxable supply of Entity B Other Services and Entity B Replacement Services to a Government Authority (being all services to be provided by Entity B in developing the Precinct, pursuant to section 9-5 of the GST Act, in return for the Project Fee (being an amount equal to the proceeds of sale of each Allotment, less the GST payable by a Government Authority to the Commissioner of Taxation in respect of the sale) and the transfer of the Other Allotments?

Answer

Yes

Relevant facts and circumstances

The Arrangement

The arrangement between a Government Agency, Entity B and Entity A is underpinned by four primary documents:

1.    Heads of Agreement entered into between a Government Agency and Entity B and Entity A.

2.    Draft Development Agreement between a Government Agency, Entity B and Entity A.

3.    Draft Lease entered into between a Government Agency (Lessor) and Entity A (Lessee).

4.    Draft Transfer Management Deed between a Government Agency and Entity A.

Pursuant to these documents:

·         A Government Agency will transfer the management of a Housing Estate to Entity A pursuant to a Lease entered into between a Government Agency (as Lessor) and Entity A (as tenant) and the Transfer Management Deed entered into concurrently by the same parties. Clause X of the Transfer Management Deed stipulates that the supply of the concurrent lease of the Housing Estate to Entity A under the Transaction Documents constitutes a GST-free supply of a going concern in accordance with section 38-325 of the GST Act.

·         Entity B will undertake the development of the area pursuant to development rights which the Government Agency and ENTITY A grant to Entity B under the Development Agreement. The grant of the development rights to Entity B by Entity A is pursuant to its interests under the Lease Agreement and Transfer Management Deed.

Entity B will undertake the following development obligations:

The demolition of the existing Dwellings;

·         The creation of new Allotments (for both the new Housing Estate to be developed by Entity B for Entity A and retained by the Government Agency as described in the Draft Development Agreement, and the Allotments which will be sold to third parties by the Government Agency;

·         The provision of Entity B Replacement Services, being the development of a new rental Dwellings on a one for one basis;

·         The provision of Entity B Other Services, being all services to be provided by Entity B in developing the Area (other than the Entity B Replacement Services) and includes the creation of approximately X Allotments.

Entity B will receive the following consideration for the development obligations undertaken in the Area:

·         $X Per Site Fee in respect of each Replacement Rental Dwelling constructed as part of the Project and handed over to Entity A for it to manage under the Lease. Entity A will pay the Per Site Fee to Entity B as an equity contribution to the cost of developing the Rental Dwellings over which it enjoys a leasehold interest for a period of X years. The balance of the consideration for the Replacement Rental Dwellings will be met from the Project Fee (outlined below) and the provision of the Allotments (outlined below) transferred to Entity B by a Government Agency.

·         A Project Fee which is described in the Development Agreement as the amount equal to the proceeds of sale of each Allotment(by the Government Agency), less the GST payable by the Government Agency to the Commissioner of Taxation in respect of the sale; and

·         The Allotments are stated to be provided for no monetary consideration.

Relevant legislative provisions

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

Reasons for decision

Question 1

Will Entity A make a taxable supply of Development Rights to Entity B in return for the Development Rights Fee of $X, pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

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.

·         A creation, grant, transfer, assignment or surrender of any right.

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.

Paragraph 72 of GSTR 2006/9 refers to observations by the High Court in Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49. In particular, the High Court recognised than an entity can provide something, and therefore make a supply, by means of refraining from acting or by means of tolerating some act or situation, just as it can by means of doing some act.

In your case, Entity A will enter into a Lease agreement for a term of X years over the Property with a Government Agency. The Property means the land including any buildings located thereon. In this case, the buildings referred to are X Rental Properties.

Pursuant to clause X of the Lease, the Lessee (Entity A) is authorised to procure, and the Lessor consents to, the development of the Land by granting the development rights to Entity B as contemplated by Clause X of the Development Agreement and more generally to procure the development of the Land in accordance with the Development Agreement.

Clause X of the Development Agreement states as follows:

Grant of development rights and undertaking of the Project

(a)  The Government Agency and Entity A grant Entity B the right to develop the Area in accordance with this agreement, in return for the Development Rights Fee (defined as $X).

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.

Entity A will acquire a leasehold interest in the Property pursuant to the Lease Agreement entered into between the Government Agency and Entity A.

Leasehold interest is a concept from real property law which is defined as the right to enjoy the exclusive possession and use of property for a defined period of time.

Consequently, Entity A, pursuant to its leasehold interest under the Lease and by its agreement to the development of the area under the Transaction Documents, is empowered to grant / supply Development Rights to Entity B in respect of the development of the area.

The consideration for the supply of the development rights is a nominal amount of $X. The supply is made in the course or furtherance of on enterprise that Entity A carries on and is made in Australia. Further, Entity A are registered for GST and the supply is neither GST-free or input taxed.

Consequently, Entity A will make a taxable supply of development rights to Entity B.

Question 2

Does Entity B make a taxable supply of Entity B Replacement Services to Entity A in return for a $X Per Site Fee pursuant to section 9-5 of the GST Act?

Pursuant to the Draft Development Agreement, Entity B will undertake the following activities in relation to the Project:

(a)  The division and development of the Area (including, without limitation, the Allotments and the other Allotments);

(b)  The delivery of Replacement Rental Dwellings

(c)   The construction of Infrastructure and landscaping; and

(d)  The marketing and sale of Allotments.

The following two terms have been used to identify the relevant activities:

·         Entity B Replacement Services - this refers to the one for one replacement of Rental Dwellings constructed as part of the Project and handed over to Entity A for it to manage under the Lease.

·         Entity B Other Services - All services to be provided by Entity B in developing the Area(other than the Entity B Replacement Services).

As outlined above in 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

In your case, the issue is whether or not Entity B makes a supply of Entity B Replacement Services to Entity A as lessee of the Property where the Government Agency remains as the registered proprietor of the Precinct. This would enable Entity A to claim input tax credits where it provides consideration in respect of any services it acquires from Entity B in relation to the Entity B Replacement Services.

Under the proposed arrangements, the Government Agency will grant a 25 year lease over the Area (whole site) to Entity A for nominal consideration. A lease, unlike a mere licence, has the dual character of being both an executed demise and an executed contract. There is a distinction between a lease itself (created by contract) and the proprietary interest of the lessee in the land (created by the demise). The right to exclusive possession when granted 'creates an interest in land'.

It follows that Entity A will itself have a proprietary interest in the Area (whole site) under the lease granted by the Government Agency. The Entity B Replacement Services are, in part, provided to Entity A under contractual arrangements to be entered into with Entity B, noting in particular the further elaboration regarding the nature of the Entity B Replacement Services as described in Clause X of the Draft Development Agreement. These arrangements are entered into by Entity A in its own right as a party having a proprietary interest in the site, and not as a licensee or agent of the Government Agency.

The general law and special statutory regimes regulate the complex area dealing with a tenant's ability to make creditable acquisitions for infrastructure constructed on a Landlord's premises which ultimately the Landlord retains title to.

Entity A's ability to claim input tax credits for a creditable acquisition in the present situation, requires in part that Entity B make a taxable supply of Entity B Replacement Services to Entity A. The proposed contractual arrangements create a legal obligation in these terms. Satisfaction of that obligation by performance on the part of Entity B, involves a taxable supply being made to Entity A.

The High Court in MBI Properties (at 34]) said that there is a 'supply' for GST purposes whenever one entity provides something of value to another entity. The same principle applies to the parallel definition of 'acquisition' in s 11-10.

Satisfaction of the obligation owed by Entity B to Entity A to provide 'Replacement Services' involves providing to Entity A 'something of value'. Those services when performed by Entity B are valuable to Entity A at least because they facilitate compliance by Entity A with further contractual obligations owed by Entity A to the Government Agency. This 'something of value' inheres to Entity A notwithstanding that the Government Agency will be a beneficiary (or the ultimate beneficiary) of the 'replacement services' either because it is the legal owner of the land or because it will take a reversion on expiration of the lease.

Based on the above considerations, and as the other requirements of section 9-5 are met, Entity B will make a taxable supply of Entity B Replacement Services to Entity A.

Likewise, given that the other requirements of s 11-5 appear to be met in the present situation (creditable purpose, consideration, registration), Entity A will make a creditable acquisition of Entity B Replacement Services from Entity B and is therefore entitled to input tax credits to the extent of the Per Site Fee ($X) paid to Entity B for each of the Replaced Rental Dwellings under the arrangement.

Question 3

Does Entity B make a taxable supply of Entity B Other Services and Entity B Replacement Services to the Government Agency (being all services to be provided by Entity B in developing the Area, pursuant to section 9-5 of the GST Act, in return for the Project Fee (being an amount equal to the proceeds of sale of each Allotment, less the GST payable by the Government Agency to the Commissioner of Taxation in respect of the sale) and the transfer of the Allotments)?

Pursuant to the Draft Development Agreement entered into between the respective parties, Entity B will undertake the Entity B Other Services on the Land. Consequently there is a supply of Entity B Other Services to the Government Agency.

Further, Entity B will also make a supply of Entity B Replacement Services to the Government Agency, in accordance with Clause X of the Draft Development Agreement.

Consideration

The issue relevant to this Question is:

What is the consideration for the supply of the Entity B Other Services and Entity B Replacement services supplied by Entity B to the Government Agency?

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.

Under subsection 9-15(2), it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

A 'payment' is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form, such as:

·         providing goods;

·         granting a right or performing a service (an act);

·         entering into an obligation, for example to refrain from selling a particular product (a forbearance).

A payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. Furthermore, for the reasons given in paragraphs 69-70 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration, the Commissioner takes the view that 'in connection with' is a wider concept than 'for' and a requisite connection between consideration and property is established where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

Whether a payment is 'in connection with' a supply is determined by considering whether there is sufficient nexus between the supply and the payment. Consideration for a supply is something the supplier receives for making the supply. It may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction.

For real property transactions, 'consideration' has the relevant nexus where it 'moves' the transfer of the land.

Effect of the arrangements

The parties have entered into the Development Agreement which details the development of the Area under the Project. In particular, Entity B will undertake the development of the area for the following consideration from the respective parties:

1.    Entity A will provide a contribution to the development of the Area of the $X Per Site Fee for each Rental Dwelling constructed (in connection with the Entity B Replacement Services).

2.    The Government Agency will pay Entity B a Project Fee for the Entity B Other Services and transfer the Allotments to Entity B. The Project Fee is defined as the amount equal to the proceeds of sale of each Allotment less the GST payable by the Government Agency to the Commissioner of Taxation in respect of the sale.

Irrespective that the Transaction Documents indicate that the Allotments are to be transferred to Entity B for no consideration, we consider the better view is that their provision to Entity B represents part of the consideration provided by the Government Agency in return for the development services undertaken by Entity B in the Area. The consideration comprising the Project Fee (a monetary amount) and the Allotments (being non-monetary consideration) have the relevant nexus with the supply of development services by Entity B on the land. The development services comprise both Entity B Replacement Services and Entity B Other Services[1].

Section 9-75(1)(b) of the GST Act requires that, when determining the value of a taxable supply, so far as the consideration is not consideration expressed as an amount of money, the GST-inclusive market value of that consideration is to be applied. Entity B should therefore include the value of the Allotments as consideration it receives in respect of the taxable supplies of the development services it provides to the Government Agency. The Government Agency in turn would be entitled to claim an input tax credit for the GST included in these taxable supplies to the extent that the acquisition of the development services relate to the making of taxable supplies (eg. the development of Market Allotments for sale) or GST-free supplies (eg. the development of Social Rental Housing leased to Entity A). Conversely, the Government Agency will need to report an equivalent amount for the GST payable on the supply of the Allotments to Entity B, for which Entity B should be entitled to claim an input tax credit. Guidelines on determining the GST-inclusive market value are contained in GSTR 2001/6 (see paragraph 136-165) and PCG 2016/18 GST and countertrade transactions.

Attribution

Based on the information contained in your submission and our understanding of the arrangements entered into between the parties we consider that the Determination in Schedule 5 to Goods and Services Tax Ruling GSTR 2000/29 Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25 is applicable to your circumstances.

The Determination in Schedule 5 concerns particular attribution rules where total consideration is not known.

The Determination applies where:

(a)  you make a taxable supply;

(b)  you do not know the total consideration for the supply when any consideration is received for the supply or an invoice is issued relating to the supply; and

(c)   the ascertainment of the total consideration depends on a future event or events that is not entirely within your control;

and either;

(d)  an invoice is issued relating to the supply; or

(e)  any consideration is received for the supply.

Where in a tax period before you know the total consideration, an invoice is issued relating to a taxable supply which states an amount of consideration and:

(a)  no consideration for the supply is received in that tax period - the GST on the supply is attributable to that tax period but only to the extent of the amount of the consideration stated in the invoice; or

(b)  consideration is received for the supply in that tax period - the GST on the supply is attributable to that tax period but only to the extent:

                      i.        where the consideration received is less than or equal to the amount of the consideration stated in the invoice - the amount of consideration stated in the invoice; or

                     ii.        where the consideration received is more than the amount stated in the invoice - the amount of the consideration received.

Conclusion

Entity B will be making a taxable supply of development services to the Government Agency in respect of both the Entity B Replacement Services and the Entity B Other services as there is a supply for consideration, the supply is made in the course or furtherance of Entity B's enterprise, the supply is made in Australia and Entity B are registered for GST. Further, the development services are neither GST-free or input taxed. The consideration payable by the Government Agency for the development services includes both the monetary amount of the Project Fee, and the GST-inclusive market value of the Allotments (ie. non-monetary consideration) transferred to Entity B in return for the development services.

[1] For completeness sake, we note that the XXXX Trust will be making both taxable supplies of the Market Allotments and GST-free supplies of a leasing enterprise pursuant to the Transaction Documents.

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