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Ruling

Subject: GST and one-off lump sum body corporate levy payment by developer

Question 1

Are the supplies made in return for one-off lump sum body corporate levy payments (payments) by a developer (Developer) to individual lot owners subject to GST?

Answer

No.

Question 2

Who is the recipient of the supplies made by individual lot owners in return for the payments made by a Developer?

Answer

There are no supplies made by individual lot owners in return for the payments the Developer makes.

Question 3

Is the Developer entitled to claim an input tax credit for the acquisition of supplies made by the individual lot owners in return for the payments?

Answer

No.

Relevant facts and circumstances

An Owner (Owner A) within the body corporate is looking to extinguish some lot entitlements. The body corporate has agreed to this on the basis that Owner A pays a lump sum compensation amount to each individual lot owner. Owner A will make individual payments to each individual Owner. Owner A will not enter into individual agreements with other owners, but deal with the body corporate. Owners will have to agree to the proposed Development to be entitled to the payment.

Body corporate levies will increase if the Development proceeds, the individual payments made to each owner are designed to lessen the individual owners' higher body corporate levies. In this regard, Owner A will make the payments to the body corporate in lieu of the individual owners making their usual contributions.

The majority of the residential individual lot owners are unlikely to be registered for GST and the transaction would not be part of their enterprise. Some lot owners are registered for GST (eg. a retail shop).

Under the proposal there is no obligation placed on the body corporate, it merely acts as a conduit to facilitate the transaction.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

Reasons for decision

Summary

Lot owners will not make any supply for consideration under the proposal.

Detailed reasoning

For individual lot owners to made taxable supplies, they need to do something that meets the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *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 Commissioner has adopted a meaning of the term supply that is used in overseas jurisdictions being 'to furnish or to serve' or 'to furnish or provide'. Evidence of the Commissioner's use of this definition is found at paragraph 41 of GSTR 2004/9, a ruling which is about the assumption of liabilities.

In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'.

Further a supply is not subject to GST in Australia unless it is made for consideration. Consideration 'for a supply or acquisition' is defined in section 195-1 of the GST Act as any consideration, within the meaning given by section 9-15 of the GST Act, that is 'in connection with the supply or acquisition'. We consider that, in the context of the GST Act, the expression 'you make the supply for consideration' in paragraph 9-5(a) of the GST Act has a similar meaning to 'there is consideration for the supply that you make'.

The references in the GST Act to 'supply for consideration' and more commonly to 'consideration for a supply' underscore the close coupling between the supply and the consideration that is necessary before a payment will be consideration for a supply that will make the supply subject to GST.

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. In determining whether a payment is consideration under subsection 9-15(1) of the GST Act, the test is whether there is a sufficient nexus between the supply and the payment made.

The meaning given to the term 'in connection with' in Berry v FC of T (1953) 89 CLR ('Berry's case') is applied with regard to the structure of the definition of supply in the GST Act. In Berry's case, Kitto J held that 'in connection with' was a broader test than 'for'. At page 659, his Honour commented that consideration will be in connection with property where:

'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made. The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive.

Under the proposal it is possible that individual land owners may agree or disagree with the Developer's proposal and voice consent or opposition accordingly. It may be possible that some individual owners abstain from voicing any opinion at all.

Broadly, if enough individual lot owners agree to the proposed development so that it may proceed, all individual owners receive the payment. Individual owners who oppose the Developer will also receive the payment. In this respect, it is considered that there is no nexus between the payments by the Developer and the acts of the individual lot owners. If the development proceeds, all lot owners will receive the payment, regardless of their individual acts. It follows that where there is no nexus between an act and a payment, there is no possibility of a taxable supply being made.

As individual lot owners are merely exercising their usual rights to agree, disagree or possibly abstain, there is no supply made and there is no commensurate GST liability, therefore there can be no recipient of a supply and no subsequent entitlement to input tax credits.