Edited version of private advice

Authorisation Number: 1051683644072

Date of advice: 01 December 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 for Sale, Project Delivery Agreement and executed Crown Lease (collectively referred to as the Transaction Documents) on the Land?

Answer

No.

Question 2

Were 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 an Australia Proprietary Company that was established on DDMMYYYY. Entity A carried on a business of property development and was registered for GST between DDMMYYYY and DDMMYYYY.

On DDMMYYYY Entity A entered into a Contract for Sale for the grant of a Crown Lease for the Land from the relevant government agency (Contract).

Under the Contract the relevant government agency agreed to grant a Crown Lease to Entity A upon completion of the Contract on substantially the same terms and conditions as the Specimen Lease annexed to the Contract.

The purchase price stated in the Contract was $X (including any GST payable). The supply was made under the margin scheme. On DDMMYYYY the relevant government agency granted a Crown Lease over the Land to Entity A. The Crown Lease was granted on substantially the same terms and conditions as the Specimen Lease annexed to the Contract.

The Contract was contingent upon the relevant government agency and Entity A entering into the Project Delivery Agreement (PDA) prior to or at the same time they entered into the Contract. Entity A must comply with all its obligations under the PDA. The PDA includes the Development Guidelines that sets out the manner in which the development is to be constructed.

The Annexures attached to the Contract are:

•   Specimen Lease.

•   Project Delivery Agreement.

•   Block Details Plan.

•   Background Documents Schedule.

•   Special Conditions.

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

The Contract, Crown Lease and the PDA (including the Development Guidelines) (collectively the Transaction Documents) include a number of mechanisms to ensure that Entity A satisfactorily completes the development within the agreed timeframe and to the appropriate specifications. The relevant clauses in the Transaction Documents are outlined below.

Contract of Sale

¢Under clause X the Contract is conditional upon operational acceptance of the Works and registration of a deposited plan for the Stage.

¢Under clause X of the Special Conditions, Entity A was required to comply with the Development Guidelines and acknowledged, by execution of the Contract, having read and understood its contents.

¢Clause X of the Special Conditions is with respect to the PDA and the Security. In particular:

-   Entity A and relevant government agency entered into the PDA prior to or at the same time they entered into this Contract.

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

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

-   Entity A must not sell any part of the Land or any dwelling erected or to be erected on the Land or permit any transfer of the Land to be registered until it has complied with all of its obligations under the PDA.

-   Entity A agrees to relevant government agency retaining and using the security payable by Entity A to relevant government agency, for the performance of its obligations under the Contract and PDA. The security is set at X% of the contract price.

-   The relevant government agency may register a charge or caveat over the Crown Lease provided that it does not prevent the registration of a mortgage by Entity A in respect of the Lease. Furthermore, the relevant government agency agrees to withdraw the charge or caveat once Entity A has complied with its obligations under the Contract and PDA and Entity A requesting the relevant government agency to do so.

Crown Lease

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 Lessee is Entity A.

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

¢The Lease specifies the purpose for which the premises may lawfully be used:

-   residential use limited to multi-unit housing of not less than X dwellings and not more than X dwellings and in additional the premises may also be used for one or more of a number of other specified purposes subject to specified conditions.

¢Entity A must undertake the following:

(a) complete within X months from the commencement date of the Lease, complete the erection of the approved development on the land in accordance with the plans and specifications submitted to and approved by the relevant government agency.

(b) provide and thereafter maintain the following, in accordance with the plans and specifications approved in writing by the relevant government agency:

-       hydraulic mains, stormwater drains and sewer lines, hydraulic fire mains and hydrants on the land in accordance with plans and specifications submitted to and approved by the relevant government agency

-       storage areas, covered car parking, hardstanding car parking, adequately illuminated vehicle access roads, pedestrian pathways and vehicle access drives on the land with plans and specifications submitted to and approved by the relevant government agency

-       landscaping in accordance with plans and specifications submitted to and approved by the relevant government agency

(c) and also:

-       provide facilities to a standard acceptable to the relevant government agency to enable electrical and telephone cables and wires to be installed underground

-       not remove any tree without the written consent of the relevant government agency Territory

-       screen and keep screened all service areas to the satisfaction of the relevant government agency and ensure that all plant and machinery contained within the premises is suitably screened from public view

-       not erect any building or make structural alterations to any building without the relevant government agency's written approval

-       maintain repair and keep in repair the premises to the satisfaction of the relevant government agency.

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, point (a) is referred to as 'approved development' and point (b) and (c), as 'additional site works'.

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

-   if an approved development is not completed within the period specified

-   if after completion of approved development, the Land is not used for a period of one year for the purpose for which the Crown Lease was granted

-   failure to observe or perform other covenants under the Crown Lease.

¢Subject to Entity As paying all money required to be paid under the provisions of the relevant legislation, Entity A shall 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.

Annexure B: Project Delivery Agreement (PDA)

The PDA was entered into on the same date as the Contract, being DDMMYYYY. Its purpose is to set out the obligations of Entity A and the relevant government agency with respect to developing the site.

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 of the PDA is with respect to Design and Development Outcomes. Under clause X, the Developer must design and construct all buildings on the land consistent with (a) all applicable laws, (b) the Development Guidelines and (c) the terms and conditions contained in the PDA.

Clause X of the PDA is with respect to the relevant government agency endorsement of the Initial Development Application. In particular:

¢Entity A is obliged to consult with the relevant government agency and seek endorsement from the relevant government agency for the Initial Development Application (DA) prior to the lodgement of the DA with the relevant government agency, as well as undertaking any changes that are reasonably required to be made by the relevant government agency.

¢The relevant government agency will endorse the initial DA if it complies with all applicable laws and includes changes reasonably required by the relevant government agency.

¢Entity A is required to submit the initial DA to relevant government agency in the form endorsed by the relevant government agency in accordance with clause X and must not lodge a DA with relevant government agency that has not been endorsed by the relevant government agency.

¢If the relevant government agency requires a variation or amendment to the DA, Entity A must submit the varied or amended version of the DA to the relevant government agency for endorsement prior to the relevant government agency resubmission.

Clause X of the PDA outlines Entity A' obligation in respect of any Subsequent Development Application (SDA). In particular:

¢Entity A cannot lodge an SDA with the relevant government agency for Development Approval until it has been endorsed by the relevant government agency.

¢The relevant government agency will endorse the SDA if it complies with all applicable laws and includes changes reasonably required by the relevant government agency.

¢Entity A is required to submit the SDA to the relevant government agency in the form endorsed by the relevant government agency in accordance with clause X.

¢If the relevant government agency requires a variation or amendment to the SDA, Entity A must submit the varied or amended version of the SDA to the relevant government agency for endorsement prior to relevant government agency resubmission.

Clause X of the PDA is with respect to consultation that is required between the relevant government agency and Entity A. In particular Entity A must:

¢Attend an introductory meeting with the relevant government agency to be briefed on the DA at a time to be agreed upon but not later than X Business Days after Completion.

¢Attend a second meeting with the relevant government agency and Entity A's architect to present concept designs at a time to be agreed upon but not later than X months after Completion.

¢Attend a third meeting with the relevant government agency and Entity A's architect to present and discuss detailed designs at a time to be agreed upon but not later than X months after Completion.

¢Attend any further meetings reasonably required by the relevant government agency to discuss the designs and the DA.

Clause X of the PDA imposed Sustainability Requirements on the buildings erected on the Land by Entity A.

Clause X of the PDA provides that Entity A is required to sell not less than X% of all dwellings erected on the land as Affordable Housing. If the land is subdivided into one or more parcels Entity A must sell not less than X% of all dwellings erected on each of those parcels as Affordable Housing.

Clause X of the PDA is with respect to driveway and associated works. It specifies that, within X months from the date of the PDA, Entity A must in accordance with approved plans and specifications complete the Driveway Works. 'Driveway Works' means construction of a driveway, verge crossover and kerb cutting on the Land and adjoining verge (including all ancillary works and fittings).

Clause X of the PDA specifies that Entity A must, within X months after completion of the Contract:

¢Complete construction of dwellings on the Land in accordance with the Development Approval and obtain a Compliance Certificate in respect of each Crown Lease.

¢Complete the Services at its expense in accordance with all applicable laws and requirements of each relevant government agency.

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

¢Entity A must provide the relevant government agency security for the performance by Entity A of its obligations under the PDA. The security amount is set at X% of the contract price.

¢If Entity A breaches its obligations, the relevant government agency may remedy the breach and call on the security payment for all costs reasonably incurred for or in connection with relevant government agency remedying the breach.

¢The security to the extent that the relevant government agency has not called on or is not entitled to call on will be released to Entity A following completion of its obligations under the PDA.

¢In addition to the Security amount Entity A will charge in favour of the relevant government agency the whole of their interest in the Land and Crown Lease as security for the performance of its obligation under the PDA and Contract.

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

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

Clause X of the PDA is with respect to sale of the property. In particular:

¢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 on which the relevant government agency is required to release the Security) unless certain conditions are satisfied.

¢Entity A may enter into agreements for sale before the Release Date in respect of dwellings it erects on the Land provided that any agreement entered into is subject to and conditional upon Entity A performing its obligations under the PDA.

Pursuant to clause X of the PDA, 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 made under or in connection with the PDA to pay to the supplier the amount of GST in respect of the taxable supply (unless the taxable supply is expressly stated to be GST inclusive). Any amounts of GST only need to be paid when a tax invoice has been issued in respect of that taxable supply.

Development Guidelines

The purpose of the Development Guidelines is to provide a framework for the development at the site. The Development Guidelines must be adhered to and compliance is mandatory under the Contract. A copy of the Development Guidelines were provided and form part of this ruling.

Other documents/information provided

Stamp duty paid, was calculated on the value of $X.

The development and building approval process

Entity A lodged a development application on DDMMYYYY and obtained approval on DDMMYYYY for the construction of buildings containing townhouses with attached garages and surface parking, associated landscaping, paving and other site works in accordance with the plans, drawings and other documents and items submitted with the application approval and endorsed as forming part of the approval.

On DDMMYYYY a certificate of compliance was issued the relevant government agency.

Following the completion of the development (at a cost of about $X), satisfaction of its obligations under the Transaction Documents, and receipt of the certificate of compliance and the certificate of occupancy and use, Entity A applied to the relevant government agency for approval of the sub-division of the parcel under the relevant legislation. On DDMMYYYY, Entity A lodged the approved units plan for registration with the relevant government agency. The Crown Lease was also required to be lodged.

On the same day the relevant government agency registered the units plan, the Crown Lease came to an end due to the operation of the relevant legislation. Entity A then became the holder of an estate in leasehold in each unit for the same term as the original Crown Lease. The relevant government agency cancelled the original Crown Lease and issued certificates of title for each unit under the relevant legislation to entity A.

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. 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 shows that the development works are performed for the benefit of the lessee and are not provided to the relevant government agency.

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 lease - a market value lease - was $X.

The cost of the development was $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 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 conditions contained in 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 government agency policy outcome rather than the provision to the relevant State/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/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/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 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 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 agency.

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