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Ruling

Subject: GST and supply of interest

Question 1

(a) Are you entitled to an input tax credit when you make a cash payment and transfer legal title to the land to Entity A?

(b) If yes, what is the amount of the input tax credit that you are entitled to?

Answers

(a) Yes

(b) The amount of input tax credit that you are entitled to is equal to the amount of GST payable by Entity A on its taxable supply.

Question 2

(a) Does the transfer of legal title to the land, from you to Entity A, constitute a taxable supply?

(b) If so, what are the GST consequences?

Answers

(a) No

(b) Not applicable.

Question 3

How much GST is payable by you on your supply of an interest in the land and premises to Entity A?

Answer

The amount of GST payable on the taxable supply is calculated by reference to sections 9-70 and 9-75 of the GST Act.

Relevant facts and circumstances

You and Entity A have entered into Agreement B dated ddmmyyyy. You are also entering into a Agreement A dated ddmmyyyy.

You supplied a copy of Agreement B and a draft copy of the Agreement A.

Agreement B

Agreement B contains various clauses. The most relevant for the purposes of this ruling are:

The Organisation is not permitted to assign any of the Agreement B or any of its obligations, powers or rights under the Agreement B without your prior written consent.

You have an interest in any Land and Premises in various circumstances including if, (as in this instance):

(a) the freehold interest in Land and/or Premises is or has been vested in, or transferred to Entity A by you or

(e) if you are identified as having an interest in the Land and/or Premises in any other legal agreement.

Entity A charges the Land and Premises with the performance of its obligations under this Agreement and agrees to you lodging an absolute caveat over the land and premises to secure the performance of Entity A's obligations under this Agreement.

Various clauses also place limitations on Entity A with respect to the transfer, mortgage or sale of interests in the Land and Premises.

The agreement outlines procedures and remedies in the event that Entity A fails to comply with its obligations. Ultimately, you have the right to transfer ownership, possession and management of the Land and Premises to another entity or to yourself if, in your opinion, Entity A fails to meet specified obligations.

In the event the Agreement is terminated under clause zz, and you transfer the Land and Premises to another entity or to yourself, Entity A will not be entitled to and will not make any claim for any payment or compensation for the Land and Premises unless Entity A has contributed money for the acquisition or development of particular Land and / or Premises and its financial interest is expressly provided for in a legal agreement between the Parties.

Agreement A.

The Agreement sets out the terms on which Land and Premises are to be developed. The most relevant for the purposes of this ruling are:

There are limitations on what Entity A can do with respect to the transfer, mortgage or sale of its interests in the Land and Premises. In essence, Entity A can only deal with title to the land and premises if it has authorisation from you.

The Agreement details the dates and amount of payments that you are required to make (your Financial Contribution).

Entity A is required to make a Contribution in return for an interest in the Land and the Premises in the event of termination of the Agreement.

Entity A accepts all risks in respect of the design, construction and commissioning of the Premises including the actual cost of the design, construction and commissioning of the Premises being greater than anticipated.

Entity A shall indemnify and keep you indemnified against all Losses suffered as a result of an act or omission on the part of Entity A.

Entity A must not enter into the Construction contracts without prior consultation with you ….and must not depart from the Construction Programme without your written consent.

Entity A acknowledges that you assume no liability for the execution or performance of the Construction Works or in connection with the Construction Contracts or the condition and characteristics of the Land.

You are not obliged to make any payments in connection with the Construction Contracts…take any action to complete or remedy the Construction Works.

You are not liable to pay any monies to the Organisation or any other party over and above your Financial Contribution.

The Land and Premises must be used, managed and maintained in accordance with Agreement B and your Financial Contribution is not to be used for the maintenance or ongoing operation or management of the Premises.

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 9-70

A New Tax System (Goods and Services Tax) Act 1999 section 9-75

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

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-25

Reasons for decision

Question 1

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act explains that you have made a creditable acquisition for GST purposes if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered, or required to be registered, for GST.

In your case, you are registered for GST The outstanding elements are whether you acquire anything solely or partly for a creditable purpose and whether there is a taxable supply to you by Entity A (including that you provide, or are liable to provide, consideration for the supply).

Acquired solely or partly for a creditable purpose

Section 11-15 of the GST Act explains that you have acquired a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise: However you do not acquire it for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature.

You conduct an enterprise with activities which include funding and regulating the provision of a community service. Your activities include making input taxed supplies, and taxable supplies.

In this instance, you make an acquisition from Entity A which is not related to any input taxed supplies.

Therefore, your acquisition can be regarded as being made for a wholly creditable purpose.

The supply of the thing to you is a taxable supply

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

· it makes the supply for consideration

· the supply is made in the course or furtherance of an enterprise that the entity carries on

· the supply is connected with Australia,

· and the entity 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.

Does Entity A make a supply to you?

Under section 9-10 of the GST Act supply is defined to include, amongst other things, a supply of services and an entry into, or release from, an obligation.

You have a business objective to provide a community service. The development of the community service sector assists in achieving this objective. To this end, Entity A agrees to undertake the provision of various services. The processes for this are detailed in the Agreements, which also outline the rights and entitlements of the parties.

You have argued that the supply by Entity A is the supply of their obligation to undertake the provision of the services, in accordance with the Agreements. It is also arguable that Entity A is making a supply of the actual services and that the Agreements are simply the mechanism for the delivery of those services. In either case, Entity A will make a supply to you within the meaning of section 9-10 of the GST Act.

Is it a supply for consideration?

Under the terms of the arrangement, Entity A has agreed to undertake the provision of the services. You agreed to make a cash contribution and transfer the legal title to the land.

Consideration can be monetary or non-monetary, or both.

The cash payment is monetary consideration for the supply by Entity A. However, you have also transferred legal title to the land to Entity A. Therefore, it is necessary to consider whether this is non-monetary consideration for the supply by Entity A.

Paragraph 68 of GSTR 2001/6 Goods and Services Tax Ruling: non-monetary consideration, states that in determining whether a payment is consideration under subsection 9-15(c), the test is whether there is sufficient nexus between the supply and the payment made.

Paragraph 80 of GSTR 2001/6 states that consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction.

Paragraph 81 of GSTR 2001/6 explains that for a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply.

In this instance, although you transfer legal title to the land, you retain your interest in the land. Entity A is not free to deal with the land as it sees fit. It is only entitled to deal with the land in accordance with the Agreements. The various clauses dealing with breach, termination and determination of interests further illustrate that you retain 100% of the interest in the property up until the time that Entity A makes its contribution in accordance with Agreement A.

Prior to Entity A's contribution, Entity A has no interest in the land and premises. Your extent of interest is specifically stated to be 100%. What is in fact supplied by you is the mere legal title to the land. You maintain effective control of the land and premises. As stated in paragraph 50 of Goods and Services Tax Ruling GSTR 2008/3:dealings in real property by bare trusts, the legal title of itself has no economic value.

As the legal title, of itself, has no separate economic value and independent identity, it is not compensation (consideration) for the making of the supply by Entity A. It follows that the value of Entity A's taxable supply is equal to the cash contribution made by you.

On the basis that Entity A meets the other elements of section 9-5 and the supply is not otherwise GST-free or input-taxed, the supply of the thing to you is a taxable supply for which you provide consideration (in the form of the cash contribution). As the other elements of section 11-5 are met, you have made a creditable acquisition from Entity A.

What is your ITC entitlement?

The amount of GST payable on the taxable supply to you is calculated by reference to sections 9-70 and 9-75 of the GST Act. The amount of your input tax credit entitlement is equal to the amount of GST payable by Entity A on its taxable supply (see section 11-25 of the GST Act).

Question 2

For a transaction to give rise to a taxable supply under the GST Act, you must meet the elements of section 9-5, including that the supply is made for consideration.

In working out the consideration for the supply by Entity A of obligations or services (being the cash contribution), it was concluded that there was no economic value attached to the transfer of the legal title to the land from you to Entity A. While it is arguable that the transfer of legal title is a supply within the meaning of section 9-10, as it has no value, it is a supply made for no consideration. Therefore, the supply does not satisfy all of the requirements for a taxable supply pursuant to section 9-5 of the GST Act.

Question 3

Under section 9-10 of the GST Act, the definition of supply includes, among other things, a creation, grant, transfer, assignment or surrender of any right. Entity A has agreed to make a payment of $xx. In return, you have, in an economic sense, surrendered yy% of your interest in the land and premises, which comprises the right to yy% of the proceeds from sale of the land and premises upon expiry or termination of the agreement. This meets the definition of a supply as prescribed in the GST Act.

When you supply a right to Entity A of yy% of the proceeds of sale in the land and premises, you will meet the provisions of section 9-5 of the GST Act, as

· you will receive consideration in exchange for the supply

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia

· and you are registered for GST, and

· there is no provision of the GST Act that would make the supply by you to Entity A, GST-free or input taxed.

The amount of GST payable on the taxable supply is calculated by reference to sections 9-70 and 9-75 of the GST Act.