Edited version of private ruling

Authorisation Number: 1011827854170

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Ruling

Subject: Sale of Land

Issue

Was the supply to Entity A of freehold title to land owned by Entity C (and leased to Entity B) for the construction of works subject to GST? If so, does the GST apply to the nominal sale price ($1) or GST inclusive market value?

Question 1

Is Entity C making a taxable supply to Entity A under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it supplies real property by way of freehold title under the Infrastructure Agreement relating to the Works?

Answer

Yes; Entity C is making a taxable supply of real property (the land) for consideration.

Question 2

If Entity C is making a taxable supply to Entity A under section 9-5 of GST Act, what is the value of the supply of freehold title to the Land?

Answer

The consideration for the supply of freehold title to the Land is equivalent to the value of the surrender of the leasehold by Entity B plus the payment of $1.00 by Entity A.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Relevant facts

Entity C has sought a private ruling on the application of the Goods and Services Tax (GST) on the supply of three parcels of land to Entity A.

Entity B and Entity C are associates and registered for GST.

Prior to the sale, the land was owned in freehold by Entity C and leased to Entity B under a 50 year lease with a 49 year option period.

Entity B granted, under an Infrastructure Agreement, a licence to Entity A to access the Land for the project.

Infrastructure Agreement

The Infrastructure Agreement is an Agreement between the three Entities.

The Infrastructure Agreement includes the following:

Clause 5 Licence

· Clause 5.1 Grant of Preliminary Investigations Licence:

(a) In consideration of the Preliminary Investigations Licence Fee (receipt of which is acknowledged), Entity B grants to the Entity A Parties a Preliminary Investigations Licence to enter upon the Subject Land for the Preliminary Investigations Purposes for the Preliminary Investigations Licence Term.

· Clause 5.2 Grant of Construction Licence:

(a) Subject to paragraphs (b) and (c) of this clause 5.2, in consideration of, … payment of the Construction Licence Fee (receipt of which is acknowledged), Entity B grants to Entity A a Construction Licence to enter and occupy the Licence Areas for the Construction Licence Purposes subject to the terms of this Agreement for the duration of the Construction Licence Term.

(The approvals and notifications required under (b) and (c) were provided.)

· Clause 5.5 Temporary Improvements

This clause authorised the construction of temporary improvements in constructing the works by Entity A and its contractors.

· Clause 8 Design and Construction of the Works

· Clause 8.1 Design and Construction of the Works

Entity B acknowledges and agrees

(a) the Project Deed provides for the design, construction and maintenance of the works by the Contractor;

(b) Under the Project Deed, the contractor is encouraged to seek innovative design and construction solutions based on specified constraints, standards, service requirements and functionality requirements; and …

· Clause 8.3 Design and Construction of the Works

(a) Entity A is responsible for the design, construction and maintenance of the works at its own cost whilst it is the franchisee in respect of the works.

(b) Entity A must cause the Works to be designed and constructed (with skill and competence, in accordance with specifications, legally, by qualified and experienced personnel and within time.)

(d) Entity A shall be responsible for the maintenance of the works after it ceases to act as franchisee in respect of the works.

· Clause 8.4 Design and Construction of Entity B Works

This clause requires Entity A to also engage its contractor to construct Entity B works, for an agreeable amount and to the same level of quality, which will be ultimately maintained by Entity B.

· Clause 8.5 Project Control Group

This clause requires the Entities to establish a Project Control Group to manage the project and provide overall direction.

· Clause 8.6 Entity B to Provide Access to Subject Land

This clause establishes protocols for the use of other Entity B lands to facilitate the construction of the motorway link and other Entity B works.

· Clause 12 Insurance and Risk

· Clause 12.1 Insurance by Entity A

The parties agree that Entity A will have public liability in relation to the Land and will be responsible for adequate insurance cover.

· Clause 13 Identification of the Subject Land and Transfer

At the time of the agreement two possible design solutions were under consideration.

Entity A was required to survey the land to identify the land essential for the Project and prepare survey plans and obtain necessary consents and approvals depending on which solution was selected.

· Clause 13.3 Partial surrender of Lease

Entity B is required, as soon as survey plans were available, to request the Entity C to vary the lease by excising the Land from the Lease and ensure the Land was unencumbered.

· Clause 13.4 Transfer of Subject Land

Entity A is required to prepare the Transfer Document and submit it to Entity C for agreed execution.

On the transfer date, Entity C is required to provide the executed document and give Entity A vacant possession of the land; Entity A is required to pay the sale fee ($1.00).

Entity A indemnified Entity C for any loss or damage incurred during the period between the variation of the lease and the transfer of the Land.

· Clause 13.5 Easement

Entity C is required to grant easements to facilitate access by Entity A to the Land for maintenance. Entity A is responsible for the preparation of the easement documents and plans and to attend to registration.

· Clause 13.6 Access for maintenance of Crossings and to Severance Area

Entity A grants access to Entity B and Entity C over the Land for the purpose of repairs and maintenance of the Crossings and any future crossings agreed with Entity A.

· Clause 13.8 Consents and Fees

The Parties agree to use their best endeavours to procure the consents to registration of any survey plans or easements required.

Entity A agrees to pay the costs in respect of the preparation and registration of all survey and easement plans or documents required.

· Clause 13.9 Attorney

Entity B appoints the CEO of Entity A as its attorney to execute consents and other necessary documents to give effect to the agreement in accordance with Clause13.

· Clause 13.10 Operation of Works

The Parties agree, if construction is completed before the transfer of the Land to Entity A, then Entity B and/or Entity C shall grant to Entity A a licence for a period ending on the transfer date, to operate and maintain the works constructed on the Land.

Entity A indemnifies Entity B and Entity C for any loss or damage incurred during this period of operation.

· Clause 14 Entity B not Liable

The Parties agree that Entity B is not liable for the costs of work under the agreement or any delay in carrying out the Work unless it is occasioned by a breach of this Agreement by Entity B.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Entity C.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue

The Land was previously supplied by Entity C to Entity B under a 50-year lease with a 49-year option for the whole of the site.

Under the Infrastructure Agreement, Entity B has supplied part of the site (the Land) to Entity A under licence for the purpose of carrying out the works. In addition, Entity B has agreed to surrender its rights in relation to the Land to enable Entity C to supply unencumbered freehold title of the Land to Entity A.

Question 1

Is Entity C making a taxable supply to Entity A under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it supplies real property by way of freehold title under the Infrastructure Agreement relating to the Works?

Summary

Yes; Entity C is making a taxable supply of real property (the land) for consideration.

Detailed reasoning

The requirements that must be satisfied for a supply to be a taxable supply are set out under section 9-5 of the GST Act. The section provides that an entity makes a taxable supply if:

(a) the entity makes the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that the entity carries on

(c) the supply is connected with Australia, and

(d) the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

There are no circumstances which would make the supplies GST-free under Division 38, or input taxed under Division 40, of the GST Act.

Supply

Section 9-10 of the GST Act defines the meaning of supply broadly as 'any form of supply whatsoever'. Under paragraph 9-10(2) of the GST Act 'supply' includes:

(a) a supply of services; …

(b) a grant, assignment or surrender of *real property;

(c) a creation, grant, transfer, assignment or surrender of any right;

(d) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(e) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

In entering into the Infrastructure Agreement in relation to the Works, Entity C agreed to supply freehold title to the Land to Entity A. This is a supply under paragraph 9-10(d) of the GST Act.

Consideration

Consideration is defined in section 195-1 of the GST Act to mean 'any consideration within the meaning given by section 9-15, in connection with a supply or acquisition'. Subsection 9-15(1) of the GST Act provides that consideration includes any payment, or any act or forbearance, in connection with a supply of anything or in response to or for the inducement of a supply of anything.

For the purposes of the GST Act it is clear that 'consideration' has a broad meaning. Consideration includes anything done or offered by way of reward or remuneration provided in connection, in response to or for the inducement of the supply. The definition includes payments as well as other acts or forbearances made in connection with the supply, which means that consideration may be monetary (consideration expressed as an amount of money) or non-monetary, or a combination of both.

Assuming compliance with its various obligations to Entity B and Entity C, Entity A will be entitled, under the Infrastructure Agreement, to compel Entity C to take such steps as are necessary on its part in order to effect registration of the transfer of freehold title of the Land, albeit at Entity A's expense. Entity C is not entitled to any further payment in consideration of its performance of such obligations other than the nominal sale fee of $1.00 under Clause 13.4 of the Infrastructure Agreement.

Goods and Services Tax Ruling GSTR 2001/6 GST: non-monetary consideration (GSTR 2001/06) explains how the GST Act applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, if it is non-monetary consideration). This includes transactions commonly referred to as barter, part exchange and 'in kind' payments.

When Entity B, Entity C and Entity A entered into the Infrastructure Agreement in relation to the Works they agreed to a barter exchange.

At paragraph 3, GSTR 2001/6 states:

Something that is non-monetary consideration can itself be a taxable supply. The Ruling describes when this can happen and gives guidelines for identifying what the consideration is for such a supply.

GSTR 2001/6 states at paragraph 16:

By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply you make. If it is a taxable supply, you need to determine the GST inclusive market value of the consideration you receive for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you.

By supplying real property by way of freehold title to Entity A, Entity C is both making a supply and providing consideration for the supplies by Entity A. In surrendering its leasehold rights in relation to the Land, Entity B is both making a supply and providing consideration for the supply by Entity C. Similarly, in completing the works, Entity A is both making a supply and providing consideration for the supplies by Entity B.

The following is a summary of the supplies and related consideration that arose when the parties entered into the Infrastructure Agreement and from their activities under the agreement.

The supplies are made in the course or furtherance of enterprises that the entities carry on.

The supplies are connected with Australia because the land on which the Works are situated is in Australia (see subsection 9-25(4) of the GST Act) or because the works services were done in Australia (see subsection 9-25(5) of the GST Act).

The Entities are registered or required to be registered for GST.

Taxable supply

Entity C is making a taxable supply to Entity A under section 9-5 of the GST Act when it supplies real property by way of freehold title under the Infrastructure Agreement relating to the Land/Works.

Question 2

If Entity C is making a taxable supply to Entity A under section 9-5 of GST Act, what is the value of the supply of real property by way of freehold title to the Land?

Summary

The consideration for the supply of freehold title to the Land is equivalent to the value of the surrender of the leasehold by Entity B plus the payment of $1.00 by Entity A. In effect, the GST inclusive market value of the Land is $18,590,001 (being $16.9 million plus GST of $1.69 million plus $1.00).

Detailed reasoning

The amount of GST on a taxable supply is 10% of the value of the taxable supply (see section 9-70 of the GST Act).

The value of a taxable supply is defined under section 9-75 of the GST as the aggregate of the consideration for the supply expressed as an amount of money without any discount for the amount of GST (if any) payable on the supply and the GST inclusive market value of non-monetary consideration.

The GST inclusive market value is defined under section 195-1 of the GST Act as the market value of the consideration or thing, without any discount for any amount of GST … payable on the supply.

GSTR 2001/6 identifies reasonable methods for determining the GST inclusive market value of non-monetary consideration and provides guidance when this valuation should be done.

Paragraph 138 of GSTR 2001/6 states as follows:

138. Where the consideration for a supply is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply (see Paragraph 9-75(1)(b) of the GST Act). In most circumstances where parties are dealing at arm's length, we are of the view that the goods, services or other things exchanged are of equal GST inclusive market value.

In accordance with paragraph 138 of GSTR 2001/6, we accept that the supplies exchanged between Entity C, Entity B and Entity A have an economic value and, for each Entity the values of the supplies made and consideration received are of equal GST inclusive market value.

The GST payable in relation to the supplies by each entity under the Infrastructure Agreement will be equal to the input tax credits available on the acquisitions obtained representing the consideration.

The market value of the supply of the Land by way of freehold title to Entity A is equal to the market value of the surrender of the leasehold of the Land by Entity B plus $1.00.

The market value of the surrender of the leasehold of the Land by Entity B has been valued as $XX, X00,000) plus GST.

Accordingly, the GST inclusive market value of the supply of freehold title to the Land is $XX,XXX,00X (being $XX.X million plus GST of $X.XX million plus $1.00).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9
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
A New Tax System (Goods and Services Tax) Act 1999 Section 9-25
A New Tax System (Goods and Services Tax) Act 1999 Section 9-70
A New Tax System (Goods and Services Tax) Act 1999 Section 9-75
A New Tax System (Goods and Services Tax) Act 1999 Division 38
A New Tax System (Goods and Services Tax) Act 1999 Division 40
A New Tax System (Goods and Services Tax) Act 1999 Section 195-1