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Subject: GST and the supply of new residential premises

Question

Is the transfer of 100% of the legal interest in land and premises from Entity A to Entity B under the terms of the Transfer of Properties Project Deed (the Deed) a taxable supply?

Answer

No, the supplies of premises that are residential (not new residential) premises are input taxed supplies. The supplies of premises that are new residential premises are not taxable supplies as no consideration is received for the supply.

Relevant facts and circumstances

§ Entity A is a government department responsible for the supply of community housing.

§ As part of its objective to increase the supply of community housing Entity A enters into Agreements (the Agreement) with a number of different Community Housing Organisations (CHOs) (Entity B).

§ The CHOs are not-for-profit organisations that are endorsed as charitable institutions under section 176-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The Agreement

§ The Agreement provides for community housing to be facilitated by CHOs in one of two ways:

o Legal title to land and premises is transferred from Entity A to the CHO. Under this arrangement, this land and premises is included in Schedule A of the Agreement ("Schedule A properties"); or

o Residential premises owned by Entity A are leased to CHOs to be managed by the CHO. Under this arrangement, the properties are included in Schedule B of the Agreement ("Schedule B properties").

§ Under the Agreement, a number of requirements are specified to be performed by the CHO in exchange for either the title to, or the lease of, land and premises from Entity A. These obligations include the CHO:

o Obtaining and maintaining endorsement as a charitable institution under section 176- 1 of the GST Act;

o Ensuring that the premises are supplied to eligible persons for consideration that is less than 75% of the GST inclusive market value of that supply thereby qualifying the supply as a GST-free supply;

o Maintaining its level of registration as a CHO with Entity A in accordance with any relevant laws and policies;

o Preparing, and at all times maintaining, a three year business plan which addresses matters such as the CHO's future business directions, its activities, and the CHO's profitability, risk management, growth forecast etc;

§ In the event the CHO defaults on any of the obligations above, Entity A may transfer ownership, possession and management responsibilities of the relevant land and premises to another CHO or to DoH.

§ In this instance, a CHO has previously entered into the Agreement to manage Schedule B properties (Residential premises that are owned by EntityA and leased to it to be managed by the CHO).

§ You advised that some of the properties will be residential properties whilst others will meet the definition of new residential premises as defined in the GST Act.

Project Deed: Transfer of Properties

§ You now propose to execute a document called "Project Deed: Transfer of Properties" (the Deed). In broad terms Entity A will transfer to the CHO, 100% of the legal title of the property currently being managed by that CHO.

§ Under the Recitals in the Deed the proposed transfer of the Properties to the CHO is subject to the terms and conditions outlined in the existing Agreement and this Deed.

§ Under clause x the parties agree that no monetary or non-monetary consideration will be provided by the organization to Entity A for the transfer of the Properties.

§ The transfer of the properties is subject to

o Government approval (Clause xx.2)

o The CHO being a party to the binding Agreement (clause xx.3)

o Payment of the transfer duty by the CHO (clause xxx.2)and

§ Under the Deed, once legal title to the previously managed properties is transferred from Entity A to the CHO, the property is moved from Schedule B of the Agreement to Schedule A. (Clause xxxx (a))

§ Clause xxxx sets out the Treatment of Properties under the Agreement:

(a) The Organisation acknowledges and agrees that on the Settlement Date of each of the Properties, Entity A will delete the Properties from Schedule B of the Agreement and add the Properties to Schedule A of the Agreement.

(b) The Organisation acknowledges and agrees that it is satisfied for the purposes of clause yy(d) of the Agreement the Organisation with the addition of the Properties to Schedule A.

(c) The Organisation acknowledges and agrees that the Properties will continue to be subject to the terms of the Agreement until sold or otherwise disposed of in accordance with the terms of the Agreement.

(d) For the avoidance of doubt, the Organisation acknowledges and agrees that:

(I) it has not contributed any funds towards the acquisition or development of the Properties; and

(II) it will not be entitled to any payment or compensation in respect of the Properties in the event that Entity A exercises its rights under the Agreement and takes control and possession of the Properties or affects the transfer of an estate in fee simple of the Properties to an alternative CHO.

§ Clause xxxxx provides.

On and from the date of settlement:

(a) The Organisation must continue to conduct allocations in accordance with the Agreement and Policies; and

(b) The Organisation must continue to ensure that each Dwelling Unit is occupied by Tenant in accordance with the Agreement and Policies.

(This restates the requirements of clause z of the Agreement).

§ Depending on the individual properties, the properties being transferred will be a combination of either residential premises or new residential premises as defined in the GST Act.

§ As specified under clause y of the Agreement, once legal title to the property is transferred, Entity A will continue to have an interest in the land and premises.

§ Under clause yyy.3 (d) of the Agreement where:

o Entity A provides written consent in accordance with clause yyy2.3(b) or yyy2.3 ( c ) and the Organisation proceeds to sell, assign, transfer or dispose of the land and premises the subject of consent, the Organisation must:

§ (i) direct the entire proceeds of any such Sale assignment transfer or disposal (net of any reasonably incurred transaction costs) towards the growth of the Organisations portfolio of CHO in accordance with the written consent granted under clause yyy.3(b) or yyy.3 ( c )

§ (ii) account for those proceeds in its Annual budget Forecast and Audited financial statements and

§ Fulfil or comply with any other reasonable terms and conditions imposed by you as a condition of its consent under this clause.

§ Under clause zz-5 of the Agreement, Entity A has the right to transfer ownership, possession and management of the land and premises, despite the CHO having legal title of the land and premises if there is a breach of the contracts and a satisfactory outcome is not achieved from any process under clauses zz-1 to zz-4.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 9-5,

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

A New Tax System (Goods and Services Tax) Act 1999 9-20,

A New Tax System (Goods and Services Tax) Act 1999 40-35 and

A New Tax System (Goods and Services Tax) Act 1999 40-70.

Reasons for decision

You advised that some of the premises will be residential (not new residential) premises - which will be input taxed supplies of residential premises under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). However, the balance of them will be new residential premises as defined in section 40-70 of the GST Act. Therefore it is necessary to consider whether in transferring legal title of the new residential premises to the CHO you are making a taxable supply in accordance with section 9-5 of the GST Act.

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.

Enity A's transfer of legal title:

· meets the definition of supply in the GST Act

· is made in the course or furtherance of its enterprise

· is connected with Australia and

· Entity A is registered for GST.

Therefore it is necessary to consider whether there is any consideration for these supplies.

Consideration can be monetary or non-monetary, or both. Section 9-15 of the GST Act provides that consideration includes:

· Any payment or any act or forbearance in connection with a supply of anything, and

· Any payment or any act or forbearance in response to or for the inducement of a supply of anything.

Goods and Services Tax Ruling GSTR 2001/6: non-monetary consideration sets out the Commissioners view on non-monetary consideration. At paragraph 81 it 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.

Prior to entering into the Deed, the CHO had undertaken to meet various requirements as set out in the Agreement's. The Deed restates in part some of the requirements set out in the Agreement. However, the Deed does not confer on you any benefit that is not already contained in the Agreement. Therefore, in entering into the Deed and transferring legal title to the land you do not receive anything that has any additional economic value or independent identity. Consequently, you do not receive any non monetary consideration.

As there is neither monetary or non monetary consideration received for the transfer of the legal titles to the new residential premises, your transfer of legal title does not meet the requirements of subsection 9-5(a) of the GST Act. Consequently the transfer of legal title will not be a taxable supply.