Edited version of private advice

Authorisation Number: 1051796726912

Date of advice: 16 February 2021

Ruling

Subject: Attribution of GST on sale of land and exemption from income tax

Issue 1 - GST

Question 1

Will the supply of two Properties by you under respective Contracts of sale pursuant to the exercise of an option(s) by the recipient be a taxable supply on which GST will be payable under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply of the two Properties by you under the respective Contracts of sale will satisfy all the requirements of a taxable supply on which GST will be payable under section 9-5 of the GST Act.

Question 2

Will the particular attributions rules set out in the Goods and Services Tax: Particular Attribution Rules Where Total Consideration Not Known Determination 2017 (PAR 2017 Determination) made under subsection 29-25(1) of the GST apply in relation to the attribution of the GST payable by you on the taxable supply of two Properties?

Answer

Yes.

Issue 2 - Income tax

Question 3

Will you still be exempt for income tax pursuant to item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year(s) the proceeds from the sale of the land occur?

Answer

Yes

Question 4

Will you be exempt for income tax pursuant to item 9.1(c) of section 50-45 of the ITAA 1997 in the year(s) dividends are received from the 50% ownership in the recipient from the distribution of profits (if any)?

Answer

Yes

Question 5

If you are exempt for income tax pursuant to item 9.1(c) of section 50-45 of the ITAA 1997 in the year(s) dividends are received, will you be entitled to a refund of franking credits attached to the dividend (if any)?

Answer

No

Relevant facts and circumstances

You are an incorporated company limited by guarantee established to promote and conduct a sport. You are a non profit body that is exempt from income tax under item 9.1(c) of section 50-45 of the ITAA 1997.

You are registered for GST and account on a non cash (accrual) basis.

Your constitution prevents distribution of income and property to members and provides your main objectives is the encouragement of a sport.

You are the legal owner of several separately titled parcels of land from which you conduct your enterprise

You propose entering into a development agreement with a developer and others to subdivide a portion of your Land. You and the others will agree to establish a new corporate entity (Company) which will own the development land for the purpose of constructing residential dwellings on the subdivided lots which the Company will sell.

You propose granting the Company a call option which will allow the Company to purchase that part of your Land which will correspond to the development land on the exercise of the option. The purchase price for the development land will be set in the Contract for the sale of land. The agreement between the parties refers to an entitlement to an additional payment for your interest in the Land paid from the proceeds from the sale of the subdivided lots.

All proceeds from the sale of subdivided lots received by you are to be retained and used by you solely for your objectives. Immediate use will be substantial renovation layout and landscaping, with other funds to be retained for future cashflow requirements in promoting your objectives.

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 9-15

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-17(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 29-5

A New Tax System (Goods and Services Tax) Act 1999 section 29-25

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 50-47

Income Tax Assessment Act 1997 Section 50-90

Income Tax Assessment Act 1997 Section 207-90

Reasons for decision

Issue1 - GST

Question 1 Is the supply of each of the Properties a taxable suppl?

Under section 9-40 of the GST Act you must pay the GST payable on any taxable supply you make. You make a taxable supply under section 9-5 of the GST Act if, amongst other things, you make a supply for consideration.

Is there a supply?

Under section 9-10 of the GST Act a supply includes a grant, assignment or surrender of real property or a creation, grant, transfer, assignment or surrender of any right. Accordingly, both the grant of a call option by you (grant of a right) and the subsequent supply of Property 1 and Property 2 under each of the Contracts of sale to the Company on exercise of the option(s) will come within the definition of a supply.

Is there consideration?

Section 9-15 of the GST Act defines consideration for a supply to include any payment or any act or forbearance, in connection with, in response to or for the inducement of a supply of anything.

Under subsection 9-17(1) of the GST Act if a right or option to acquire a thing is granted then

•         the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the option or right or

•         if there is no such additional consideration there is no consideration for the supply.

Conclusion

As you are registered for GST and will make the supply under each of the Contracts of sale of development Property 1 and Property 2 which are located in Australia to the Company for consideration in the course of an enterprise you carry on and the supply of the Properties will neither be GST-free or input taxed all the requirements of a taxable supply will be satisfied. As such the supply of the Properties will be taxable supplies on which GST is payable.

Question 2 Will the particular attribution rule apply to attribute the GST payable?

Basic attribution rule

Subsection 29-5(1) of the GST Act provides that the GST payable by the WGC on the taxable supply of each of the Properties will be attributable to:

• the tax period in which any of the consideration is received for the supply or
• if, before any of the consideration is received, an invoice is issued relating to the supply - the tax period in which the invoice is issued.

This means that under the basic attribution rule where no invoice is issued prior the GST payable by you on the taxable supply of each of the Properties will be attributable in the tax period in which you receive any of the consideration with the GST payable calculated by reference to all of the consideration for the supply including the additional consideration.

Determination of particular attribution rules

Subsection 29-25(1) of the GST Act allows the Commissioner to alter the basic attribution rules in relation to GST on a taxable supply or ITCs for a creditable acquisition of a specified kind by way of a written determination.

The PAR 2017 Determination covers instances where the total consideration for a supply is not known to prevent the basic attribution rule applying in a way that is inappropriate in the circumstances.

Subclause 4(1) of the PAR 2017 Determination applies where:

•         you make a taxable supply or creditable acquisition

•         you do not know the total consideration when any part of the consideration is paid or received or when an invoice is issued relating to the supply or acquisition and

•         the ascertainment of the total consideration depends on a future event or events that is not entirely within your control

and either

-        an invoice is issued relating to the supply or acquisition or

-        any consideration is received or paid for the supply or acquisition

•         the determination applies only if you do not account on a cash basis

•         the determination is substantially the same as the determination it replaces.

Conclusion

No invoice will issue prior to any consideration being paid or received by you so that under paragraph 2 of clause 5 of the PAR 2017 Determination you will attribute GST to the tax period you receive any of the consideration but only to the extent of the consideration received in that tax period.

Under paragraph 3 of clause 5 of the PAR 2017 Determination you will attribute GST on any increase in consideration (additional consideration per unit sold) to the earlier of the tax period or tax periods in which:

•         you issue an invoice for the increase in consideration or

•         you receive any of the additional consideration.

Issue 2 - Income Tax

Question 3

Detailed reasoning

The entity is currently treated as an exempt from income tax entity pursuant to item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997.

To retain this treatment the entity must continue to satisfy the requirements under section 50-45 of the ITAA 1997 and special conditions under sections 50-47 and 50-70 of the ITAA 1997.

These are that the entity;

1. is a society, association, or club; and,
2. is established for the encouragement of a game or sport; and,
3. is not an ACNC type of entity; and,
4. is not carried on for the purposes of profit or gain to its individual members; and,
5. has a physical presence in Australia or meets other tests; and,
6. complies with all the substantive requirements in its governing rules; and,
7. applies its income and assets solely for the purpose for which the entity is established.

Society, association, or club

The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning.

The Macquarie Dictionary defines 'club' as a 'group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members'.

The entity is a society, association or club for the purposes of section 50-45 of the ITAA 1997.

Established for the encouragement of a game or sport

Game or sport

Paragraph 38 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs TR 97/22 provides a non-exhaustive list of activities that are considered to be a 'sport' for the purposes of section 50-45 of the ITAA 1997.

The entity satisfies this condition.

Encouragement

Paragraph 11 of TR 97/22 refers to the meaning of 'encouragement' as that defined in the Macquarie dictionary as 'stimulation by assistance'. TR 97/22 further provides that encouragement can occur directly by:

•         forming, preparing and entering teams and competitors in competitions in the game or sport;

•         co-ordinating activities;

•         organising and conducting tournaments and the like;

•         improving the abilities of participants; improving the standard of trainers and coaches;

•         providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors; or

•         encouraging increased and wider participation and improved performance;

and can occur indirectly:

•         through marketing; or

•         by initiating or facilitating research and development.

The entity's objective is the encouragement of a game or sport.

Therefore, the second test remains satisfied.

Main purpose

Paragraph 14 of TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all of the clubs features, including those outlined in paragraphs 15 and 16 of TR 97/22.

The fact that a club undertakes other activities does not, of itself, preclude a club from being exempt. As noted by Lockhart J in Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215 at 4225, where an association conducts other activities, which are merely ancillary or incidental or secondary to the encouragement of the game or sport, we accept that the main purpose may be that of encouragement. In contrast, where an association's main purpose is the undertaking of these other activities, the exemption does not apply.

In order for an entity to be exempt as a club established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to a sporting end. If they become an end in themselves, it will be difficult for a club to demonstrate that it is predominantly for the encouragement of a game or sport.

In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294, the club provided and promoted an extensive range of sporting activities including golf, bowls, tennis and other sports, games and pastimes. The club also had extensive social facilities that were used by the club's members and also by a large number of non-members. In the most recent year reported in the case, 90.3% of the club's income came from poker machines, bar trading and catering but only 16.9% was spent on sporting activities.

The Court ruled in favour of the taxpayer and concluded that the main purpose of the Club was the promotion of athletic sport and not one established for the purpose of carrying on a business of gambling, provision of entertainment and food, and the selling of time-share units. Hill J concluded that, while the social activities of the club were extensive and could be seen as an end in themselves, the activities were pursued as a means of financing the extensive sporting activities conducted by the Club. While the non-sporting activities were vital to the club's financial survival, they were neither equal nor predominant in importance to the sporting activities.

Analysing the facts under the features described in TR 97/22 support the conclusion that the Club's main purpose continues to be the encouragement of a game or sport.

Not an ACNC type entity

It has already been concluded above that the entity was formed principally for the encouragement of a game or sport. As the entity has a non-charitable purpose, it is not capable of being a registered charity. Therefore, the entity is not an ACNC type of entity and section 50-47 of the ITAA 1997 does not apply.

Non-profit requirement

Subsection 50-70(1) of the ITAA 1997 requires that the club not be carried on for the purpose of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. A club usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. A club's actions must also be consistent with the non-profit requirement.

The entity's constitution prevent the distribution of any income or property to members.

As such, the entity satisfies the non-profit requirement.

Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia

For a club to meet this condition, it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursue its objectives principally in Australia.

The entity has a physical presence in Australia. It incurs its expenditure and pursues its purposes in Australia.

Governing rules

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt TR 2015/1 provides guidance in respect of the conditions in subsection 50-70(2) of the ITAA 1997. Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

•         give effect to the object or purpose of the entity

•         relate to the non-profit status of the entity

•         set out the powers and duties of directors and officers of the entity

•         require financial statements to be prepared and retained

•         set out the criteria for admission as a member of an entity

•         require an entity to maintain a register of members, and

•         relate to the winding-up of the entity.

The proceeds received by the entity are to be retained and used by the entity solely for the Clubs objectives.

Based on a review of the entity's constitution, which incorporates the entity's objects, it is accepted that the entity complies with the substantive requirements set out in its constituent document.

Application of income and assets

Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied.

As previously determined, the activities of the entity demonstrate that the entity is complying with the main purposes for which it was established. Therefore, it is accepted that the entity applies its income and assets solely for the purpose for which it was established.

Accordingly, the entity satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997.

Conclusion

Based on the above, the total ordinary income and statutory income of the entity is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is a club established for the encouragement of a game or sport, pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997.

The entity will continue to be a tax-exempt entity.

Question 4

Detailed Reasoning

The reasoning discussed in response to question 1 is applicable to this question.

Provided there is no material change in the clubs activities or in the criteria previously mentioned in the years dividends are received, then the mode of delivery of the profits to the entity from the development does not materially change the conclusion that they continue to maintain their tax-exempt status.

Question 5

Detailed Reasoning

As the entity continues to be a tax-exempt entity, they will not be entitled to a refund of franking credits in accordance with section 207-90 of the ITAA 1997.

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