Edited version of private advice

Authorisation Number: 1051980989234

Date of advice: 7 July 2022

Ruling

Subject: GST and the development of long-term leases

Question 1

Is Entity A making a creditable acquisition, pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) of development services from Entity B for the Works completed pursuant to the Contract for sale, Holding Leases and Deed of Agreement (collectively the Transaction Documents) with respect to the Land?

Answer

Yes, but only to the extent of the specified Works.

Question 2

Are the development services (identified in Question 1) supplied by Entity B, additional consideration pursuant to section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the supply of the Land by Entity A?

Answer

Yes, but only to the extent of the specified Works.

Relevant facts and circumstances

The description of the scheme is based on information provided by you in the various documents, which are to be read in conjunction with the facts as set out below:

On ddmmyyyy Entity A entered into an arrangement with Entity B for the purchase and development of the Land. The Land will contain predominantly residential premises and some commercial premises. Entity A and B are registered for GST.

On ddmmyyyy a Holding Lease was executed by Entity C on behalf of the Commonwealth under the Contract for Sale of the Land (the Initial Holding Lease). On ddmmyyyy the Deed of Agreement was executed by Entity C (the Deed).

The Holding Lease was granted to enable Entity B to undertake the development of the Land

Entity B was required to completed specified works as set out in an Annexure to the Deed in order to obtain a Certificate of Practical Completion and to be entitled to the grant of the Consequent Leases.

Entity B completed the works under the Deed and received the Certificate of Practical Completion.

In mmyyyy, consequent leases for individual lots were granted and sales of these lots began to settle.

Copies of the executed Sale contracts, Holding Leases and the Deed of Agreement were supplied for purposes of the ruling.

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 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

Reasons for decision

In this reasoning, please note:

• 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's website ato.gov.au

Question 1

Reasoning

Section 11-5 provides that you make a creditable acquisition if:

a)    you acquire anything solely or partly for a creditable purpose

b)    the supply of the thing to you is a taxable supply

c)    you provide, or are liable to provide, consideration for the supply; and

d)    you are registered or required to be registered.

Supply of the thing to you is a taxable supply and you provide (or are liable to provide) consideration.

Pursuant to section 9-5 a taxable supply is made where the supply is made for consideration, the supply is in the course or furtherance of an enterprise that is carried on, the supply is connected with the indirect tax zone and the supplier is 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.

The meaning of 'supply' is given in section 9-10. A supply is any form of supply whatsoever and includes:

•         A supply of goods.

•         A supply of services.

•         An entry into an obligation to do anything.

An entity will make a supply when that entity (the supplier) provides something of value to another entity (the recipient)[1]

Entity A has granted Entity B short-term holding leases to allow Entity B to undertake the Works on the land. These works are required to be completed in order to obtain the Certificate of Practical Completion and subsequently be granted the consequent leases by Entity A. When Entity B completes the Works, Entity B is providing something of value to Entity A and is therefore making a supply to Entity A.

Entity B is making supplies to the Entity A in Australia, in the course or furtherance of their property development enterprise. Entity B is registered for GST. These supplies Entity B makes to Entity A are neither GST-free nor input taxed.

It therefore remains to be determined whether Entity B's supplies to Entity A were made for consideration.

Section 9-15 provides that consideration includes any payment in connection with a supply of anything and any payment in response to or for the inducement of a supply of anything.

Paragraph 12 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6) explains that consideration is not limited to payments of money:

12. 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); and

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

Paragraphs 50 and 51 of GSTR 2001/6 provide that there needs to be a connection between the supply and the payment for the supply to be made for consideration:

50. Section 9-15 further provides that 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. Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply.

51. It follows that there are two elements to the definition of consideration. The first is the payment by one entity to another. The second element is the nexus that must be established between the payment and a supply.

Paragraphs 71 and 72 of GSTR 2001/6 provide that the test of determining a sufficient nexus between the supply and the consideration is an objective one based on the true character of the transaction.

Goods and Services Tax Ruling GSTR 2015/2 Goods and services tax: development lease arrangements with government agencies (GSTR 2015/2) explains the GST treatment of particular transactions arising in the context of development lease arrangements entered into between government agencies and private developers and outlines their particular features.[2]

Sometimes in the relevant Territory, the Government releases land for sale to developers by granting a holding lease to the developer which is then followed by the grant of a 99 year long-term lease to the developer. The principles outlined in GSTR 2015/2 may apply to these arrangements in the relevant Territory.[3]

Paragraphs 14 and 15 of GSTR 2015/2 discuss common features of development lease arrangements. Paragraph 22 describes the actions that are typical in a development lease arrangement including that:

•         The government agency grants a short-term lease to the developer to allow the developer to undertake development works on the land

•         The developer undertakes development works on land owned by the government agency

•         The government agency transferring the freehold interest in the land or granting a long-term lease of the land to the developer

•         The developer making one or more monetary payments to the government agency.

The facts of this case align with the scenario outlined in paragraphs 13-15 of GSTR 2015/2 for the following reasons:

•         Entity A is progressively granting Entity B long-term leases over the Land, pursuant to the statutory objectives as set out in the specified Act, as and when Entity B completes its relevant obligations under the Deed (namely, completion of the Works)

•         Entity B bears all costs associated with the development of the Land as per clause X of the Deed

•         Entity B is undertaking the Works its own account and not as agent or builder for Entity A

•         Entity B is required to undertake the Works in accordance with the timeframes set out in the Holding Lease and Deed or risk forfeiting its entitlement to the Holding Lease and right to apply for the Consequent Leases under the Deed

•         Entity A is required to grant the long-term Consequent Leases on behalf of the relevant Territory to Entity B upon the progressive Completion of the Works for each identified Stage, as set out in the Deed and the Holding Lease

•         Entity B is required to complete additional off-site works and, interdependent works on land to be returned to the Territory as per various clauses under the Deed.

Paragraphs 11,12 and 35 of GSTR 2015/2 discuss supplies made for consideration:

11. Where the terms of the development lease arrangement make the supply of the land subject to or conditional on the developer completing specified development works, supply of the land by the government agency is consideration for the developer's supply of development services.

12. Where the developer completes additional works on land retained by the government agency, the developer makes a supply of development services to the government agency. The supply of the land by the government agency is consideration for this supply of development services by the developer if:

•         the terms of the development lease arrangement make the government agency's supply of land subject to or conditional upon the developer completing the additional works, and

•         Divisions 81 and 82 do not apply.

...

Paragraph 35 explains further:

35. There is a sufficient nexus between the development services and the transfer of freehold or grant of a long-term lease if the development lease arrangement makes the supply of the land subject to or conditional on the developer completing specified development works. For example, the developer only becomes entitled to the freehold or long-term lease on completion of the development or a particular stage of the development.

...

On these facts Part 5 of the Deed makes the granting of the long-term Consequent Leases conditional upon CED satisfactorily completing the Works for the relevant Stage in the development of Blocks 5, 6 and 7 as set out in clause A1.1 of Annexure A1 of the Deed. It is these works that have the relevant nexus to the grant of the Consequent Leases by the SLA. The granting of the Consequent Leases by the SLA is consideration for the completion of the A1.1 works.

While Building Works (as defined in the Deed) are permitted on the Land, they are not explicitly included in the definition of 'Works', and therefore do not form part of the 'Works' that must be completed in order for the Consequent Leases to be granted to Entity B.

We consider that Divisions 81 and 82 do not apply to the Entity A's grant of the Consequent Leases to Entity B.

The supply of the Works by Entity B to Entity A meets all the requirements of section 9-5 and therefore the supply of the Works to Entity A is a taxable supply.

Creditable purpose

Section 11-15 provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise and the acquisitions do not relate to input taxed supplies or acquisitions of a private or domestic nature.

An 'enterprise' is defined in subsection 9-20(1) to be an activity or series of activities done, among other things, by the Commonwealth, a State or a Territory, or a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory[4].

Entity A is a statutory authority. Entity A's objects include the delivery of suburban development.

Accordingly, in advancing the objects described, Entity A is carrying on an enterprise.

When Entity A makes acquisitions of the Works from Entity B, Entity A will acquire them in carrying on its enterprise. These acquisitions do not relate to input taxed supplies nor are they of a private or domestic nature. These acquisitions are therefore for a creditable purpose.

Conclusion

Entity A acquired the Works for a creditable purpose, the Works are a taxable supply to Entity A and Entity A provided consideration for the supply and is registered for GST.

As the requirements of section 11-5 are met your acquisition of the Works under the Deed will be a creditable acquisition.

Question 2

Reasoning

Subsection 9-15(1) provides that consideration includes:

(a)  any payment, or any act or forbearance, in connection with a supply of anything; and

(b)  any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

As discussed in the reasoning for the answer to Question 1 above, paragraph 12 of GSTR 2001/6 provides that a 'payment' is not limited to a payment of money and includes a payment in a non-monetary form.

Paragraphs 11 and 35 of GSTR 2015/2 discusses supplies made for consideration under development lease arrangements:

11. Where the terms of the development lease arrangement make the supply of the land subject to or conditional on the developer completing specified development works, supply of the land by the government agency is consideration for the developer's supply of development services. The supply of development services by the developer is, in turn, consideration for the supply of land by the government agency.

...

35. There is a sufficient nexus between the development services and the transfer of freehold or grant of a long-term lease if the development lease arrangement makes the supply of the land subject to or conditional on the developer completing specified development works.... For example, the developer only becomes entitled to the freehold or long-term lease on completion of the development or a particular stage of the development.

As set out in Question 1, there is a sufficient nexus between the completion of the Works and the supply of the Land. We consider that the terms of the arrangement make the supply of the Land subject to the completion of the Works. Therefore, we consider that, as per paragraph 11 of GSTR 2015/2, the supply of development services in the form of the Works by Entity B is additional consideration for the Entity A's supply of the Land for the purposes of section 9-15.

[1] Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies at paragraph 71

[2] GSTR 2015/2 at paragraph 1

[3] GSTR 2015/2 at paragraph 6

[4] paragraph 9-20(1)(g) of the GST Act.

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