Edited version of private advice

Authorisation Number: 1051828236054

Date of advice: 21 April 2021

Ruling

Subject: GST and long-term leases

Question

Were the development works (collectively, the building works and associated site works) undertaken by the developer pursuant to the Contract for Sale, Project Delivery Agreement and the executed Crown lease (collectively referred to as the Transaction Documents) on the Land, non-monetary consideration pursuant to section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the taxable supply of the Land by Entity A under section 9-5 of the GST Act to the developer?

Answer

No.

The building works are not non-monetary consideration for the taxable supply of the Land by Entity A.

However, to the extent that completed associated site works automatically belong to a government agency or are transferred to a government agency, or a third party nominated by a government agency (whether on unleased land or Crown lease land), these associated site works are considered non-monetary consideration for the taxable supply of the Land by Entity A. On the material provided to us there do not appear to be any such works.

Relevant facts and circumstances

On a specified date, Entity A entered into a Contract for the grant of a 99 year Crown lease for the specified Land in the State A to the developer (the Purchaser). The Land location was specified. The Completion Date of the contract was also specified in the documents provided.

Entity C is the authorised body to grant, administer, vary and end leases on behalf of the Commonwealth. Entity's authority was delegated to Entity A.

Under the Contract Entity A, as delegate of Entity C and on behalf of the Commonwealth of Australia agreed to grant, or procure the grant of, a 99 year Crown lease to the Purchaser on completion of the Contract on substantially the same terms as the Specimen Lease annexed to the Contract.

The purchase price was stated in the Contract (including any GST payable) and completion of the Contract occurred on a specified date, at which time Entity C was required to, and did grant, a Crown Lease over the Land to the Purchaser. It was agreed that the margin scheme apply to the supply of the Land. The Crown lease was granted on substantially the same terms as the Specimen Lease annexed to the Contract.

The Contract is contingent upon Entity A and the Purchaser entering into the Project Delivery Agreement (PDA) prior to or at the same time they entered into the Contract.

The Purchaser must comply with all of its obligations under the Transaction Documents.

Entity A did not make any monetary payments to the Purchaser in relation to any development works. Further, Entity A has not received any invoices from the Purchaser in relation to any development works.

Relevant legislative provisions

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 referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

Under section 9-15, 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. Therefore, there must be a sufficient nexus between a particular payment and a particular supply for a payment to be consideration for that supply.

That is, there are two elements to the definition of consideration, which are:

•         the payment by one entity to another, and

•         a nexus that must be established between the payment and a supply.

Goods and Services Tax Determination GSTD 2021/1 Goods and services tax: development works in the Australian Capital Territory, provides advice on the GST treatment of arrangements between government agencies and private developers in the context of the development of land in the State A.

In particular, GSTD 2021/1 considers whether 'building works' carried out by developers on land they have acquired under a long-term Crown lease (Crown lease) and 'associated site works' are non-monetary consideration for the supply of that lease by a government agency.

The Transaction Documents in this case show that the arrangement between the Entity A and the Purchaser have the typical features of a building arrangement as outlined in GSTD 2021/1 and has application in this case.

Paragraphs 5 to 12 of GSTD 2021/1 state:

5.    Under a building arrangement, the monetary amount a developer pays to a government agency on completion of the contract to acquire a Crown lease over land in the State A is consideration for the supply of the Crown lease by the government agency for the purposes of section 9-5.

6.    However, the building works a developer completes under a building arrangement (in accordance with the terms of the PDA and the Crown lease) are not consideration for the supply of the Crown lease by the government agency under section 9-5.

7.    The building works are not non-monetary consideration for the supply of the Crown lease land because the building works provide no measurable economic value to the government agency. The building works are of value to the developer as they can either retain the land, subdivide the land and sell the individual lots or sell the Crown lease land in its entirety to another entity.

8.    While the developer is required to complete these building works within a certain time period after acquiring the Crown lease, this stipulated timeframe does not make these works non-monetary consideration for the supply of the Crown lease.

9.    As explained in paragraph 3 of this Determination, the developer may also be required to undertake associated site works which fall into three categories.

10.  If ownership of the completed associated site works is retained by the developer, they are not non-monetary consideration for the supply of the Crown lease land by the government agency. This is because the associated site works retained by the developer provide no measurable economic value to the government agency.

11.  While building works and associated site works retained by the developer may assist in fulfilling a government agency's objectives of developing areas of land, they do not provide the government agency with anything other than assurance that the land is developed in compliance with the relevant government approved plans and the development complies with relevant laws (for example, environmental or health and safety laws).

12.  Completed associated site works that automatically belong to a government agency or are transferred to a government agency, or a third party nominated by the government agency^... (whether on unleased land or the Crown lease land), are non-monetary consideration for the supply of the Crown lease land. This is the case provided Division 81 and Division 82 do not apply.

In order for the building works or associated site works to be consideration for the supply of the Crown lease land, there must be sufficient nexus between the supply and the consideration.

For goods, services or a 'thing' to be non-monetary consideration for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. It must be capable of being valued and be a thing the acquirer would usually or commercially pay money to acquire.

Paragraph 39 of GSTD 2021/1 states, as the meaning of consideration is broad, not all promises and obligations made and agreed between the parties will be non-monetary consideration for a supply. Some things are simply part of the terms of the arrangement on which the respective parties have reached agreement. Promises or obligations that have no economic value or independent identity separate from the transaction will not be non-monetary consideration for a supply.

In the context of granting a lease over land, the essential character of what is supplied is the legal right to exclusive possession of the land for the term. However, this does not prevent the owner of the freehold interest in the land imposing conditions regarding permitted use that will apply for the term of the lease.

The incorporation of 'building and development provisions' into State A Crown leases, together with statutory restrictions on transfer or assignment of the Crown lease until these building and development provisions are satisfied, are standard obligations in Crown leases in the State A (paragraph 41 GSTD 2021/1).

Paragraph 43 of GSTD 2021/1 explains that in relation to the building works, while the developer does not have a freehold interest in the land, the nature of a Crown lease in the State A (usually for 99 years, at nominal rent, automatically renewable and compensation payable for the value of improvements if not renewed) results in:

a.            the developer, as lessee, being the only entity able to lease or dispose of an interest in the buildings it constructs on the Crown lease land

b.            no increase in the value of the reversion held by the State A as the rent remains nominal for the duration of the Crown lease and future renewals, and

c.             the developer or future lessees being entitled to compensation for the building works if the lease is ever terminated.

Undertaking the building works on the Crown lease land does not provide the government agency with anything of measurable economic value. For this reason, the construction of building works on the Crown lease land is not the provision of non-monetary consideration for the government agency's supply of the land.

In this case, undertaking the building works on the Land pursuant to the Transaction Documents does not provide Entity A with anything of measurable economic value. For this reason, the construction of building works on the Land is not the provision of non-monetary consideration for Entity A's supply of the Land.

The Purchaser is also required to provide associated site works under the Crown Lease. Where the completed associated site works are retained by the developer, they are not non-monetary consideration.

However, the completed associated site works that automatically belong to a government agency or are transferred to a government agency, or a third party nominated by a government agency (whether on unleased land or Crown lease land) are considered non-monetary consideration for the taxable supply of the Land by Entity A. On the material provided to us there do not appear to be any such works.

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).