Edited version of private ruling

Authorisation Number: 1011902129369

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Ruling

Subject: Building Grant

Question:

Does State Treasury ('ST') make a creditable acquisition within the meaning of Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') when ST provides a Building Grant ('BG') to a grant recipient.

Answer:

No, ST does not make a creditable acquisition within the meaning of Division 11 of the GST Act when ST provides a BG to a grant recipient.

Relevant facts and circumstances:

In its State Budget the State Government announced the BG.

The terms of the BG will be governed by a new act of the State Parliament which is yet to be introduced into the State Parliament. The facts stated in this ruling are based on the Application Guide, Application Form and a list of Frequently Asked Questions ('FAQ') issued by ST.

Frequently Asked Questions:

The FAQ states:

What is the Building Grant?

The Building Grant is a grant of $X for a person or corporation buying or building a new home in the State for a value less than $Y (house and land). The grant is to assist recovery in the housing construction sector, the State's third-largest job generating industry.

What transactions qualify for the Building Grant?

Each of the following transactions attract the grant:

1. A written legally binding contract made between [ ] and [ ] (both inclusive) for the purchase of a new home in the State.

2. A written comprehensive home building contract made between [ ] and [ ] (both inclusive) by the owner of land in the State, or a person who will on completion of the contract be the owner of land in the State, to have a new home built on the land. All owners of the land must enter into the contract.

3. The building of a home in the State by an owner builder if the building work starts between [ ] and [ ] (both inclusive). For owner builders, the start of building work is usually the laying of foundations for the home.

The applicant must usually own freehold title to the home. However, some other interests in land are also eligible….

Who can obtain the Building Grant?

The grant is open to home buyers and investors. Corporations and trustees (including superannuation funds) may also apply.

An individual applicant must be 18 years of age or over and a citizen or permanent resident of Australia.

A corporation must be substantially Australian owned to be eligible. Similarly, if the applicant is a trustee, the trust must be substantially Australian owned…

The grant is not payable for a building contract, or to an owner builder, if the applicant carries on the business of building homes and the home was constructed for sale in the course of that business.

Are there value limits?

Yes. To receive the Building Grant, the home and land value must be less than $Y.

Are there occupancy requirements?

Yes, the home must be occupied for at least three months in the first year of you owning the home. The home may be occupied by you, a family member or someone else, or rented to a tenant. A person, such as a builder, who builds a home and sells it before it is occupied cannot claim the grant. The purchaser may be eligible however. Where the occupancy requirement is not satisfied, the applicant must notify the Commissioner of State Revenue and repay the grant within 14 days…

What happens if the conditions of the Building Grant are not met?

Your application will usually not be approved if the conditions of the grant are not met. However, in some cases, the grant may be paid before all the conditions are met, such as the occupancy requirement. If the grant is paid and conditions are note subsequently met, you must notify the Commissioner of State Revenue within 14 days and repay the grant in full in that time.

Application Form and Application Guide:

Part A of the Application Form must be filled out by all applicants. Section 1 in Part A is an Eligibility Checklist which states:

Eligibility is determined after the Commissioner receives a completed application together with all required supporting evidence.

and comprises eleven questions to be answered 'YES' or 'NO' by the applicant. At the foot of the questions a paragraph entitled 'Determination of Eligibility' states that an applicant who answers 'YES' to questions 1 to 6 and 'NO' to questions 7 to 11 'may' be eligible to receive the BG 'subject to the written decision being made by the Commissioner'. Question 6 in the Eligibility Checklist asks:

Will the home be occupied as a place of residence for a period of at least 3 months (whether or not continuous) during the year after completion of the eligible transaction?

The Application Guide defines 'eligible transaction' as:

Contract of sale to purchase a home, contract to build a home, or construction of a home as an owner builder provided the total value of the new home is less than $Y. The contract must be made or the construction commenced between [ ] and [ ].

and Item 4 in Section 5 ('Eligibility Requirements') of the Application Guide states:

The home must be occupied for at least 3 months (whether or not continuous) during the year after completion of the eligible transaction. However, it does not matter who occupies the home. For example, the home may be occupied by a family member or rented to a tenant. Where the occupancy requirement is not satisfied, the applicant must notify the Commissioner of State Revenue and repay the BG within 14 days.

Section 2 in Part A of the Application Form deals with the applicant's details (including whether the applicant is a natural person, a company, or a trust). Section 3 in Part A deals with property and transaction details, including whether the relevant transaction is a contract of sale for the purchase of a home, a comprehensive home building contract, an owner builder, or a contract of sale for a purchase off the plan.

Section 4 of Part A of the Application Form deals with payment of the BG. If the applicant is not applying through an 'Approved Lodger' the applicant provides bank account details and ST pays the BG by electronic funds transfer into the nominated bank account. If the applicant is applying for the BG through an Approved Lodger (i.e. an organisation authorised by State Revenue to submit applications for the BG) then the Approved Lodger completes section 6 of Part A of the Application Form (in which the Approved Lodger agrees to receive the BG and hold it on trust exclusively on behalf of the Commissioner of State Revenue pending settlement of the contract of sale for the purchase of a home or payment of the scheduled first progress payment for a contract to build a new home and to apply the BG exclusively for the purpose of effecting settlement of the contract of sale or payment of the first progress payment).

Section 5 of Part A of the Application Form contains a declaration to the signed by the applicant in the presence of a qualified witness. Section 5 includes the following declarations:

2. I undertake to notify the Commissioner of any notifiable event in writing relevant to the requirements under the Building Grant and repay the BG within 14 days from the relevant date…

8 I acknowledge that I will be liable for penalties and may also be prosecuted for making a false or misleading statement in connection with this application for the BG or for not notifying OSR of a notifiable event.

The Application Guide defines 'notifiable event' follows:

When any part of the eligibility criteria is not met, the applicant must notify the Commissioner within 14 days of the relevant date. An example would be where the home is not occupied as a residence for at least 3 months (whether or not continuous) during the year after completion of the eligible transaction.

(The Application Guide defines 'relevant date' to include the date on which an applicant becomes aware that the occupation/eligibility requirement will not be complied with.)

In addition to completing Part A of the Application Form, an applicant must also complete one other Part of the Application Form which is relevant to the particular transaction, i.e. Part B (contract to buy a new home), Part C (contract to build a new home), Part D (applicant is an owner builder), or Part E (applicant has agreed to buy a new home off the plan).

Ruling request:

The ruling request referred to the matters which section 11-5 of the GST Act requires to be satisfied in order for an entity to make a creditable acquisition. It was submitted that ST will make a creditable acquisition in relation to the BG only if there is a supply of something to ST which is a taxable supply (paragraph 11-5(b)) and the BG is provided as 'consideration for the supply' (paragraph 11-5(c)). This submission relied on Goods and Services Tax Ruling GSTR 2000/11 (Para 9):

9. The GST treatment of grants depends primarily on whether the grant represents consideration that has the relevant connection with a taxable supply as set out in this Ruling. This will depend on the particular facts and circumstances of each grant program. The term grant is not defined and the general principles of the GST Act apply in determining whether GST is payable on a grant transaction.

It was submitted ('Argument 1') that there is no supply from a grant recipient to ST and therefore no 'supply of the thing to you' in terms of paragraph 11-5(b) of the GST Act. The ruling request referred to Proposition 6 ('supply' usually, but not necessarily, requires something to be passed from one entity to another') in Goods and Services Tax Ruling GSTR 2006/9 and set out the following submission (p. 17):

In the current case, the applicant is automatically entitled to receive the BG upon satisfaction of the eligibility requirements…The mere satisfaction of eligibility requirements which automatically entitle an applicant to received the BG is not a 'supply' in its own right. Consequently, where nothing passes from the grant recipient to ST there also can be no recipient of any supply.

In the alternative it was submitted ('Argument 2') that if a grant recipient did make a supply to ST, there is no nexus between the BG and that supply and the BG paid by ST is not 'consideration for' a supply made by the grant recipient in terms of paragraph 11-5(c). The ruling request referred to the test in GSTR 2000/11 (Paras 79 and 89):

79. In determining whether a payment is in connection with the supply of an obligation, we consider that the test is whether there is a link or nexus that provides a substantial relation between the substance of the obligation and the grant..

89. Things will often be supplied by the grantee to the grantor which do not go to the purpose for which the funds were granted, but which are merely part of the mechanism of making or accounting for the grant.

and to Paras 83 to 87 of GSTR 2000/11 which state that a nexus does exist between a grant and a supply by a grant recipient where the grant recipient enters into an obligation to use the grant in a manner which goes to the purpose for which the grant is made. It was submitted that this does not occur because ST acquires no right to use the new homes for the purpose of the BG, ST acquires no right to derive income from the construction or occupation of new homes, and (p. 19):

Grant recipients do not undertake to use funds in any particular manner, nor deliver specified services in furtherance of the objective of the BG being to boost the State housing construction sector.

It was further submitted ('Argument 3') that, if there was a supply, the grant recipient does not 'make' that supply to ST in terms of Proposition 5 (to make a supply an entity must do something) in GSTR 2006/9 because the grant recipient does not take any action to cause ST to provide the BG. It was submitted that a grant recipient does not do anything to cause ST to provide the BG, rather the relevant statute effects the provision of the BG. The ruling request distinguished Re Hornsby Shire Council v Commissioner of Taxation [2008] AATA 1060 where it was held that a landowner did 'make' a supply of land by way of entry into an obligation and the surrender of the land when the land owner issued a notice, pursuant to a statue, requiring Hornsby Shire Council to compulsorily acquire the land. It was submitted (p. 22):

In the current case the applicant is automatically entitled to receive the BG upon satisfaction of the eligibility requirements after completion of the eligible transaction (i.e. retrospectively) and not as a result of satisfying any active eligibility requirement. The grant recipients do not actively undertake to do, or omit from doing, furnish, serve, or provide anything. Rather, the grant recipient can only be described as taking [a] passive role, in direct contract to the active role taken by CSR Limited in Hornsby.

Reasons for decision:

Summary:

When a grant recipient signs the declaration on the Application Form the grant recipient makes a supply of entry into an obligation to do anything but the BG is not consideration for that supply because that obligation is not something that goes to the purpose for which the grant is made.

Detailed reasoning:

The relevant test:

The application of GST to grants of financial assistance is dealt with in Goods and Services Tax Ruling GSTR 2000/11 which states (Para 9):

The GST treatment of a grant depends primarily on whether the grant represents consideration that has the relevant connection with a taxable supply as set out in this ruling. This will depend on the particular facts and circumstances of each grant program…

and (Para 14) that there are three questions which are relevant to the issue of whether there is a 'supply for consideration' in relation to a grant:

is there a supply

is there consideration; and

does the necessary relationship exist between supply and consideration?

Is there a supply?

In relation to this question, subsection 9-10(1) of the GST Act provides that a supply is any form of supply whatsoever and paragraph 9-10(2)(g)(i) provides that 'supply' includes entry into an obligation to do anything.

In the ruling request it was submitted ('Argument 1') that there was no supply by a grant recipient to ST (p. 17):

In the current case, the applicant is automatically entitled to receive the QBBG upon satisfaction of the eligibility requirements…The mere satisfaction of eligibility requirements which automatically entitle an applicant to receive the QBBG is not a 'supply' in its own right. Consequently, where nothing passes from the grant recipient to QT there also can be no recipient of any supply.

In our view this submission is contradicted by the Application Form. Section 1 in Part A of the Application Form indicates that the mere satisfaction of eligibility requirements does not automatically entitle an applicant to receive the BG. Section 1 in Part A commences:

Eligibility is determined after the Commissioner receives a completed application together with all required supporting evidence.

and at the foot of the 11 questions in the eligibility checklist which the applicant is required to answer 'YES' or 'No' to:

Determination of eligibility:

If you have answered 'YES' to questions 1 to 6 and 'NO' to questions 7 to 11 above, you may be entitled to receive the BG subject to the written decision being made by the Commissioner.

If you answered 'NO' to any of the questions 1 to 6 and 'YES' to any of the questions 7 to 11 you do not qualify for the BG. If you believe you could still be entitled to the BG please attach a statement providing a complete explanation of the circumstances and all relevant information to support your claim with the application for the Commissioner to consider.

It is clear from the extract from Section 1 of Part A of the Application Form set out above that, even where the applicant answers 'YES' to questions 1 to 6 and 'NO' to questions 7 to 11, entitlement to receive the BG is 'determined' by the Commissioner and 'subject to the written decision being made by the Commissioner' and therefore is not 'automatic' as submitted in the ruling request.

Furthermore, the Commissioner requires a 'completed application' prior to determining eligibility, which means that the applicant is required to make the declarations in Section 5 in Part A of the Application Form before the Commissioner determines eligibility. Those declarations include:

2. I undertake to notify the Commissioner of any Notifiable Event in writing relevant to the requirements under the BG and repay the BG within 14 days from the relevant date…

8. I acknowledge that I will be liable for penalties and may also be prosecuted for making a false or misleading statement on or in connection with this application for the BG or not notifying ST of a notifiable event.

These provisions contradict the submission in the ruling request that 'nothing passes from the grant recipient to ST'. By signing the declaration in Section 5 in Part A of the Application Form, a grant recipient enters into 'an obligation to do anything' in terms of paragraph 9-10(2)(g) (i) of the GST Act, i.e. an undertaking to notify the Commissioner of State Revenue and repay the BG to ST in the event that the home is not occupied as a place of residence for a period of at least 3 months during the year after completion of the 'eligible transaction'.

In relation to a supply of entry into an obligation, GSTR 2006/9 refers (Para 36) to Paras 26 to 36 of GSTR 2000/11 which discuss transactions which are supplies of rights or obligations. GSTR 2000/11 states (Paras 33, 34 and 36):

33. For there to be a supply of rights or obligations, such rights or obligations must be binding on the parties. The creation of expectations among the parties does not establish a supply. An agreement that does not bind the parties in some way would not be sufficient to establish a supply by one party to the other unless there is something else, such as goods or some other benefit, passing between the parties.

34. Examples of arrangements that will indicate an agreement binds the parties include:

a provision providing that the money granted must be repaid in specified circumstances

36. We consider that the requirement that a transaction needs to bind the parties in some way before it will involve a supply has application in Australia where the transaction is the supply of a right or obligation.

In our view an applicant who signs the Application Form makes a supply of entry into an obligation which binds the parties, as required by GSTR 2000/11 - the applicant specifically undertakes in Section 5 of Part A of the Application Form to notify ST and repay the BG if the home is not occupied as a residence for at least three months (whether or not continuous) during the year after completion of the eligible transaction.

The ruling request also included a submission ('Argument 3', p. 22) that an applicant for a BG does not do something and therefore does not 'make' a supply, relying on Proposition 5 in GSTR 2006/9, 'to make a supply an entity must do something'. GSTR 2006/9 states (Para 74) that an entity 'makes' a supply 'if the entity takes some action to cause a supply to occur' and rejects the proposition that Westley Nominees Pty Ltd v. Coles Supermarkets Australia Pty Ltd 2006 ATC 4363 held that a supply can be brought about by operation of law in the absence of an entity taking positive action.(Para 78):

With respect, the Commissioner does not consider the Court has stated a general principle, contrary to our proposition, that a supply can be brought about by operation of law in the absence of an entity taking positive action. The Commissioner distinguishes something brought about solely by operation of law where there is no supply, from something done by an entity as a consequence of a legal requirement where there may be a supply, as was the situation noted by Underwood J in Shaw citing the example of the liquidator's actions in St Hubert's Island. The Commissioner also distinguishes an action that results in obligations arising by operation of law, as the Full Court found in Westley, where there may be a supply by the entity taking the action.

Thus the ATO considers (per GSTR 2006/9, Para 78) that that there is a supply where an entity does something as a consequence of a legal requirement and where an action by an entity results in obligations arising by operation of law. As noted above, Section 1 in Part A of the Application Form states that the Commissioner of State Revenue determines eligibility for the BG after receiving a 'completed application', i.e. after the applicant has signed Section 5 in Part A in which the applicant specifically declares that the applicant gives the undertaking in item 2:

I undertake to notify the Commissioner of any notifiable event in writing relevant to the requirements under the Building Grant and repay the BG within 14 days from the relevant date.

In our view the applicant gives this undertaking as a consequence of a legal requirement of the BG scheme. Furthermore it is clear from Item 8 in Section 5 in Part A that the action by the applicant of giving that undertaking results in an obligation arising by operation of law:

8. I acknowledge that I will be liable for penalties and may be prosecuted for making a false or misleading statement on or in connection with this application for the BG or not notifying ST of a notifiable event.

Is there consideration?

The second question in GSTR 2000/11 (Para 14) is whether there is consideration. Paragraph 11-5(c) of the GST Act provides that an entity makes a creditable acquisition if that entity provides, or is liable to provide, consideration for the corresponding taxable supply. Section 195-1 of the GST Act provides that 'consideration' means any consideration within the meaning given by section 9-15 in connection with the acquisition and subsection 9-15(1) provides that consideration includes any payment in connection with a supply of anything and in response to or for the inducement of a supply of anything. We consider that the BG is a payment and therefore consideration. The ruling request did not appear to dispute this, but included a submission that the BG was not consideration 'for the supply'.

Is the supply made for consideration of the grant?

The ruling request included a submission ('Argument 2', p. 19) that there was no nexus between the BG and a supply as:

Grant recipients do not undertake to use funds in any particular manner, nor deliver specified services in furtherance of the objective of the BG being to boost the housing construction sector.

We agree with that submission.

Paragraph 11-5(c) of the GST Act requires an entity to provide 'consideration for the supply' in order to make a creditable acquisition. GSTR 2000/11 discusses (Para 71) the requirement in paragraph 9-5(a) that, in order to make a taxable supply, an entity must make 'the supply for consideration' and states that there must be some nexus between supply and consideration.

GSTR 2000/11 (Paras 85 to 88) discusses the nexus test where a grant recipient supplies an entry into an obligation and states that a grant will have a sufficient nexus with such a supply if the obligation is something which goes to the purpose for which the grant is made:

85. Many grants are paid in exchange for the grantee's entry into an obligation to the grantor to do something with the grant. The grant is sufficiently connected with the supply of such an obligation if the obligation is something which goes to the purpose for which the grant is made.

86. Conditions that a grantee may enter into include a requirement to use the granted funds in a particular manner, such as to deliver specified services to the community in furtherance of an objective of the grants program. Provided that the grant is made for the purpose of those services being delivered, the acceptance by the grantee of an obligation to fulfil such conditions will establish a supply to the grantor in connection with the grant.

In the present case the FAQ indicates the purpose for which the BG is made:

What is the Building Grant?

The Building Grant is a grant of $X for a person or corporation buying or building a new home. The grant is to assist recovery in the housing construction sector, [ ]'s third-largest job generating industry.

A Budget Paper included in the State Budget provides further insight:

The Building Grant is designed to re-ignite [ ]'s housing construction sector following a combination of falling property transfers and the economic impact of a summer of natural disasters.

and a Ministerial Media Statement issued by the State Premier in 2011 refers to boosting the housing construction sector and boosting jobs.

In our view these documents support the submission in the ruling request (p. 19) that the object of the BG is to provide a boost to [ ]'s housing construction sector.

The obligation entered into by a grant recipient (i.e. the undertaking in Section 5 in Part A of the Application Form to notify the Commissioner of State Revenue and repay the BG in the event that the home is not occupied as a place of residence for a period of at least 3 months during the year after completion of the 'eligible transaction') appears to be intended to ensure that the BG generates jobs in that housing construction sector. In our view, however, that obligation is not something which goes to the purpose for which the grant is made in the sense required by GSTR 2000/11 (Para 86).

As stated above, the purpose of the BG is to boost the housing construction sector. The BG would be 'consideration for' a supply made by the grant recipient if the grant recipient gave an undertaking to apply the BG to the cost of purchasing or constructing home because such an obligation would be something which goes to the purpose for which the grant is made. However the Application Form does not suggest that a grant recipient enters into such an obligation. Where a grant recipient applies directly to the Office of State Revenue for the BG the grant recipient completes Section 4 in Part A and the BG is paid by electronic funds into the grant recipient's nominated bank account and it will be up to the grant recipient to determine how to spend the funds received. Where an application for a BG is made through an Approved Lodger, the BG is paid to the Approved Lodger who holds it on trust on behalf of the Commissioner of State Revenue and must apply it exclusively to settlement of the contract of sale for the purchase of a home or the first progress payment for a contract to build a home (Section 6, Part A, Application Form). In our view these provisions in the Application Form are designed to ensure that the BG remains separate from the Approved Issuer's assets in the event of the Approved Issuer's insolvency and to ensure that the Approved Lodger applies the BG to the grant recipient's benefit at the earliest opportunity. We do not consider that these provisions in the Application Form create an obligation which goes to the purpose for which the grant is made in the sense required by GSTR 2000/11.

For the reasons set out above we consider that the BG is distinguishable from Example 2 in GSTR 2000/11(Paras 110-111) which sets out a case where a grant recipient does enter into an obligation that goes to the purpose for which the grant is made:

110. Snake Glass Jugglers is a commercial dance troupe that develops and presents performance art. While its performances are popular and critically acclaimed, their continued presentation is not viable given increasing production costs. In order that the troupe can continue its work, and in recognition of the organisation's contribution to the arts, it receives a grant of financial assistance from the Gooseville Arts Foundation, a body that is established for the purpose of fostering the arts.

111. In exchange for the grant, the troupe enters into a written agreement to continue to develop and present its innovative performances. The agreement provides that the grant is to be repaid if the grantee fails to do this. The entry into the agreement will create an obligation that binds the grantee to do something. The obligation goes to the purpose for which the funds are granted. This obligation to the arts foundation is a supply for the purposes of paragraph 9-10(2)(g) for which the grant represents consideration that will be subject to GST.

In Example 2 the grant recipient enters into an obligation to spend the grant developing and presenting dance performances, which goes to the purpose of the grant (i.e. fostering of the arts). In the case of the BG, a grant recipient does not enter into an obligation to spend the grant in a way which boosts the housing construction sector.