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Subject: Redevelopment Funding Deed

Question:

Does subsection 156-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') apply to the supply made by X to Y under a Redevelopment Funding Deed ('the Deed') such that X's GST liability in respect of each instalment payment made to X under that Deed is attributable as if it were consideration for a separate supply?

Answer:

Yes, subsection 156-5(1) of the GST Act does apply to the supply made by X to Y under the Deed as X makes a supply on a progressive basis for a consideration that is to be provided on a periodic basis. As the progressive components of the supply made by X are not readily identifiable, subsection 156-5(2) of the GST Act applies and the components of that supply correspond to the proportion of the total consideration for that supply that the separate amounts of consideration received from Y represent.

Relevant facts and circumstances:

The parties:

X is a public company limited by guarantee.

Y is a body corporate established under State legislation.

Background:

Y and the State Government agreed to provide redevelopment funding to X. In addition, Y and Z Ltd entered into an agreement which obliges Z Ltd to provide funds to Y which is to be used by Y to provide the 'R1 Redevelopment Grant' to X under the Redevelopments Funding Deed.

The Deed:

Y and X entered into the Redevelopments Funding Deed ('the Deed') which recites that Y has agreed to establish and administer the Redevelopments Fund for the provision of the 'R1 Redevelopment Grant' and the 'R2 Redevelopment Grant' to X for the purpose of the Redevelopments in accordance with the Deed.

The Deed states that the Deed commences on the date of execution by all parties and expires on the later of the date Y has paid the total amount of the Redevelopment Grants to X and paid all of Y's costs in accordance with the Deed.

The Deed sets out X's obligations which include designing and constructing the Redevelopments, ensuring those Redevelopments are constructed in accordance with the Concept Drawings, and ensuring all relevant substantial contracts are entered into only after competitive tendering. The Deed also obliges X to submit claims for payment 'in accordance with the Distribution Methodology' as set out in the Schedule to the Deed. The Schedule to the Deed requires X at least once every calendar month to provide a 'Progress Claim' to Y 'for that period'. X Progress Claim comprises an itemised tax invoice issued by X to Y in respect of the aggregate amount of a 'Certification Request' which has been certified by the relevant Quantity Surveyor (i.e. a detailed invoice for the amount that X wishes to claim in the Progress Claim) plus copies of the relevant contractor's invoices.

Y's obligations under the Deed include paying the R1 Redevelopment Grant and the R2 Redevelopment Grant to X 'progressively by way of Progress Payments in accordance with the Distribution Methodology and on the condition that each Grant is used solely to fund each respective Redevelopment'.

Submissions:

It was submitted on behalf of the applicant that paragraph 156-5(1)(a) of the GST Act was satisfied (i.e. there is a taxable supply that is made for a period or on a progressive basis) because X was supplying the design and construction of each Redevelopment to Y which, by definition, is made over the course of the construction periods for each Redevelopment. In addition X has an ongoing obligation to ensure that each Redevelopment is undertaken in accordance with X's obligations under the Deed.

It was further submitted that paragraph 156-5(1)(b) of the GST Act was satisfied (i.e. the consideration for the supply is provided on a progressive or periodic basis) because clause 3 of the Deed provides for X to submit a Progress Claim to Y each month

Reasons for decision:

Summary:

X makes a supply of entry into an obligation which is made progressively. The consideration for that supply is provided on a periodic basis. As the progressive components of the supply are not readily identifiable, subsection 156-5(2) governs attribution of the supply made by X.

Detailed reasoning:

Division 29 of the GST Act sets out the basic attribution rules which, inter alia, govern when a GST registered entity is required to account for GST payable on taxable supplies. An entity which is not eligible to account on a cash basis is required to attribute all the GST payable on a taxable supply to the earlier of the tax period in which that entity receives any consideration for the supply or issues an invoice for that supply.

Section 29-39 provides that Chapter 4 of the GST Act contains special rules relating to attribution rules, including Division 156 for supplies and acquisitions made on a progressive or periodic basis. Section 45-5 provides that the special rules in Chapter 4 override the rules in Chapter 2 (which include Division 29), but only to the extent of any inconsistency. In relation to taxable supplies, subsection 156-5 provides:

(1) The GST payable by you on a taxable supply that is made:

(a) for a period or on a progressive basis; and

(b) for consideration that is to be provided on a progressive or periodic basis;

is attributable, in accordance with section 29-5 as if each progressive or periodic component of the supply were a separate supply.

(2) If the progressive or periodic components of such a supply are not readily identifiable, the components correspond to the proportion of the total consideration for the supply that the separate amounts of consideration represent.

The supply made by X under the Deed:

Goods and Services Tax Ruling GSTR 2000/35 states that you must look to a single supply to determine whether Division 156 applies (Para 35), that 'supply' is defined in section 9-10 of the GST Act as any form of supply whatsoever (Para 36), and that you look to documents and any other relevant matters to identify the supply to which Division 156 may apply (Para 38).

It was submitted that X is supplying the design and construction of the Redevelopments plus an ongoing obligation to ensure that the Redevelopments are undertaken in accordance with X's obligations under the Deed and that this is a supply made for a period or on a progressive basis.

We do not agree with the submission that X is supplying the design and construction of the Redevelopments. In our view those supplies are made by third party contractors to X.

However we do agree with the submission that X supplies an obligation under the Deed. Paragraph 9-10(2)(g) of the GST Act provides that 'supply' includes an entry into an obligation to do anything and Goods and Services Tax Ruling GSTR 2000/11 states:

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 contract, such as a purchaser-provider agreement;

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

  a guarantee or lien over property of the grantee; or

  an agreement such as a deed that is enforceable on its own terms even without specific remedies being provided for in the event of a breach.

The Deed refers to the 'Obligations of the X' and states that X 'must' design and construct each Redevelopment 'in accordance with specified requirements, i.e. obtain all approvals, construct each Redevelopment substantially in accordance with the Concept Drawings, conduct competitive tendering for all Redevelopment contracts, and ensure that all funds provided by Y are applied solely to fund each Redevelopment and in accordance with the Distribution Methodology. The agreement between X and Y is in the form of a deed which and creates binding obligations (e.g. Y's obligation to pay the Redevelopment Grants is conditional upon each grant being used solely to fund either the R1 Redevelopment or the R2 Redevelopment, obliges each party to do everything necessary to give full effect to the Deed, and contains dispute resolution provisions (clause 10).

Supply made for a period or on a progressive basis:

Goods and Services Tax Ruling GSTR 2000/35 states (Paras 25 - 27):

When is a supply or acquisition made for a period?

25. X supply or acquisition you make is for a period when it is made over a specified length of time or for a time with an identifiable end point. This may be stated in your contract, agreement or other similar document. However, a supply will not be for a period merely because there is a stipulated completion date.

26. If a contract for a supply of goods or services provides that they are to be delivered or completed by a specific date, that will not be a supply for a period. X supply for a period will be one which is made on a continuous basis until the stipulated end point occurs, or the period expires. An example of a supply or acquisition for a period is a contract for the supply of maintenance services for a period of 12 months.

When is a supply or acquisition made on a progressive basis?

27. X supply or acquisition you make is on a progressive basis when the contract or agreement provides for stages of the supply during the course of the supply. X supply may also be a progressive supply where, under a contract, goods or services are to be supplied on an ongoing basis. An example of a supply or acquisition on a progressive basis is a contract for supply of property management services by a real estate agent.

The Deed states that the Term of the Deed commences on the date of execution by all parties and expires on the later of Y paying the total of both Redevelopment Grants in accordance with the Deed and paying Y's Costs in accordance with the Deed. In our view X makes the supply of entry into an obligation 'on a progressive basis'. In terms of Para 27 in GSTR 2000/35 X makes that supply under a contract 'on an ongoing basis', i.e. from the date of execution of the Deed by all parties until whenever the later of the two events specified in the Term of the Deed occurs.

We do not consider that X makes that supply 'for a period' as discussed in Paras 25 and 26 of GSTR 200/35, i.e. a specified length of time or for a time with an identifiable end point. The example in Para 26 of a contract for the supply of maintenance services for a period of 12 months is made for a length of time which has a definite date on the calendar as its identifiable end point. Under the Deed, on the other hand, the end point for the relevant length of time (i.e. the later of the date on which Y has paid the total of each Redevelopment Grant and the date on which Y has paid all of Y's Costs) is not a definite date on the calendar.

Consideration provided on a progressive or periodic basis:

In our view the Redevelopment Grants payable by Y to X under the Deed are the consideration for the supply made by X. The Deed states that Y will pay the R1 Redevelopment Grant and the R2 Redevelopment Grant to X 'progressively by way of Progress Payments' on the condition that each Grant is 'used solely to fund' each respective Redevelopment.

It was submitted in the ruling request that Y will provide consideration to X 'on a periodic and progressive basis' because each month X will provide a certified Progress Claim to Y which will be paid within three business days.

GSTR 2000/35 states:

When is consideration provided on a progressive basis?

28. You provide consideration on a progressive basis when it is paid by instalments that reflect stages of a supply or acquisition: for example, progress payments on a house construction contract.

When is consideration provided on a periodic basis?

29. You provide consideration on a periodic basis when it is made in equal or unequal instalments provided upon expiration of specified periods. An example of consideration on a periodic basis is where payments are made monthly under an agreement to lease a building.

In our view Y will provide consideration 'on a periodic basis' as described in Para 29 in GSTR 2000/35, i.e. 'in equal or unequal instalments provided upon the expiration of specified periods'. The Schedule to the Deed requires X to submit a Progress Claim on the expiration of a specified period, i.e. 'at least once every calendar month during the Term' and Y provides the consideration in unequal instalments because the amount of any Progress Claim will depend on the amount of Contractors' invoices included in the relevant Certification request and certified by the relevant Quantity Surveyor.

Attribution:

Subsection 156-5(1) of the GST Act provides that the GST payable by an entity on a supply that is made on a progressive basis and for consideration that is provided on a periodic basis is attributable, in accordance with section 29-5 as if each progressive component of the supply were a separate supply.

GSTR 2000/35 states (Paras 44 - 47):

44. In order to identify the components correctly, it is important to identify a component in respect of which consideration applies. If in relation to a payment of consideration there is no corresponding component identifiable, then the component to which the payment relates will be determined in accordance with subsections 156-5(2) and 156-10(2). These sections provide that the components of the supply or acquisition will correspond to the proportion of the total consideration that the separate amounts of consideration represent.

Example 3

Identifiable components

45. Cleanrite Ltd supplies laundry services to a hotel under a three year contract . Payments are made monthly. The components of the supply to which each payment of consideration relates is the laundry services for the month in question.

Unidentifiable components

46. Crusher Pty Ltd crushes road base from a quarry. Crusher Pty Ltd enters a contract with Macadam Engineering to supply 80,000 cubic metres of road base to be delivered at a rate of 40,000 cubic metres in the first month, 10,000 in the second month and 30,000 in the third month. The GST inclusive price of $400,000 is to be paid in equal fortnightly instalments.

47. Crusher Pty Ltd cannot identify the components of the supply of road base to which each of the payments relates as no component of the supply readily corresponds to a payment. In these circumstances Crusher Pty Ltd identifies each component by reference to subsection 156 - 5 ( 2 ).

In our view the components of the supply made by X are unidentifiable - X makes a supply of entry into an obligation to do something on a progressive basis but, as with the 'unidentifiable components' example in Paras 46 and 47 in GSTR 2000/35, it is not possible to identify the components of that supply to which each payment of consideration by Y relates. GSTR 2000/35 states that, in those circumstances, subsection 156-5(2) applies. Subsection 156-5(2) provides that the components of the supply made by X correspond to the proportion of the total consideration for the supply that the separate amounts of consideration represent.