Edited version of your private ruling

Authorisation Number: 1012198218261

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Ruling

Subject: GST and Sale and Leaseback of Property

Question 1

Is the sale of the Land and furniture, fixtures and fittings (FFE) by the entity a taxable supply?

Answer

Yes, the sale of the Land and FFE by the entity is a taxable supply.

Question 2

Are the trusts entitled to full input tax credits for the acquisitions of the Land and FFE respectively?

Answer

Yes, the trusts are entitled to full input tax credits for the acquisitions of the Land and FFE.

Question 3

Is the entity entitled to full input tax credits in relation to portion of the lease which is sub-let to other tenants?

Answer

Yes, the entity is entitled to full input tax credits in relation to portion of the lease which is sub-let other tenants.

Question 4

Does the entity have any adjustments under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it sells the Land and FFE?

Answer

No, the entity does not have any adjustments under Division 129 of the GST Act when it sells the Land and FFE.

Question 5

Does the entity have adjustments under Division 132 of the GST Act when it sells the Land and FFE?

Answer

Yes, the entity has adjustments under Division 132 of the GST Act when it sells the Land and FFE.

Question 6

Does Division 72 of the GST Act apply to the sale or leaseback of the Land or FFE by the entity?

Answer

No, Division 72 of the GST Act does not apply to the sale or leaseback of the Land or FFE by the entity.

Question 7

Does Division 156 of the GST Act apply to the leaseback of the Land and FFE?

Answer

Yes, Division 156 of the GST Act applies to the leaseback of the Land and FFE.

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 9-15

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 129-20

A New Tax System (Goods and Services Tax) Act 1999, section 132-5

A New Tax System (Goods and Services Tax) Act 1999, Division 72

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The entity is a financial supply provider and purchased a property (Land) after 1 July 2000 for the purpose of operating its business.

The entity currently lets some of the premises to other, non-related tenants.

The entity is proposing to transfer the Land to a unit trust that will be wholly owned by the entity. The sole unitholder will be the entity and the trustee will be a company that is wholly owned by the entity.

The entity is also proposing to transfer the furniture, fixtures and fittings (FFE) in relation to the Land to a separate unit trust which will also be wholly owned by the entity. The sole unitholder will be the entity and the trustee will be the company that is wholly owned by the entity.

Both trusts will be registered for GST but will not be part of the entity's GST group.

The sale of the Land will be subject to a leaseback to the entity. The entity will sub-lease part of the Land to the current tenants. The sale of the FFE will also be subject to leaseback. The lease agreement for the Land imposes certain obligations on the trustee as lessor.

In addition to the sale and leaseback agreements, the entity and the trustee will enter into a separate agreement (Operational Deed). Clauses in the Operational Deed specify that some clauses in the lease agreement are to be performed by the entity (as lessee) whilst some others are 'suspended' for the duration of the Operational Deed. Obligations of the lessor that will be undertaken by the entity as lessee include ensuring that repair and maintenance of the premises; elevators; air conditioning; fire protection systems; water treatment; pest control; security and the power plant is undertaken. Obligations which are suspended are mainly in relation to service failures (eg air conditioning) and the calculation and notification of outgoings. Also suspended by the Operational Deed is the requirement for the trustee (lessor) to hold current insurance policies in relation to the premises, boiler and machinery and commercial general liability insurance. The lessee, the entity, is required to hold the insurance policies.

The sale and leaseback of the Land will be with reference to the market value. Payment of the purchase price will be satisfied by the trustee issuing units in the trust to the entity.

The sale and leaseback of the FFE will be with reference to the written down value. The draft Contract for Sale of Goods does not specify in what form the payment of the purchase price will take.

The entity claimed partial input tax credits on the acquisition of the Land.

The proposed lease of the Land and FFE by the entity will be in relation to the general purpose of carrying on its enterprise and therefore, in part, will relate to making input taxed supplies. The entity intends to apportion its input tax credits on the basis of how the building is being used.

Reasons for decision

Question 1

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that 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.

(* denotes terms that are defined in section 195-1 of the GST Act)

The sales of the Land and FFE by the entity are made in the course of its enterprise, are connected with Australia and the entity is registered for GST. Therefore, the sales of the Land and FFE will be taxable supplies if they are made 'for consideration'.

Consideration is defined by section 9-15 of the GST Act to include 'any payment, or any act or forbearance, in connection with a supply of anything…'. The sale of the Land by the entity is in return for units to the value of the purchase price. The purchase price is defined as the 'market price' which is yet to be determined. Goods and Services Tax Ruling, Goods and services tax: non-monetary consideration (GSTR 2001/6) provides guidance on the meaning of consideration, in particular when the consideration is not money. Paragraph 81 of GSTR 2001/6 states:

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. That is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire. Whether this requirement is satisfied will usually be demonstrated by the parties to an arrangement assigning a specific or separate value to the thing. However, the assigning of a value by the parties is not necessary for a thing to have economic value.

The units issued to the entity by the trustee will have an economic value and will satisfy the meaning of consideration.

Under the draft Contract for the Sale of Goods, the trustee is required to pay the entity for the purchase of the FFE. The form of that payment is not specified in the draft contract. Whether the payment is made in the form of money, debt or in units will not alter the characteristics of the payment. That is, it will be consideration for the supply of the FFE.

Therefore, all of the requirements of section 9-5 of the GST Act are met and, as the sales are neither GST-free, nor input taxed, are taxable supplies made by entity.

Question 2

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition it makes. A creditable acquisition is defined by section 11-5 of the GST Act:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Both trusts will be registered for GST, will provide consideration for the supplies and both the supply of the Land and of the FFE will be taxable supplies to the respective trusts. Therefore, the trustee as trustee for the trusts will be entitled to full input tax credits for the acquisitions if those acquisitions are solely for a creditable purpose.

Section 11-15 of the GST Act provides that make an acquisition for a creditable purpose to the extent that it is acquired in carrying on an enterprise. However, subsection 11-15(2) of the GST Act states that an acquisition is not made for a creditable purpose to the extent that it relates to supplies that would be input taxed.

Consequently, the trusts will be making fully creditable acquisitions and will be entitled to full input tax credits provided that the respective acquisitions of the Land and FFE do not relate to supplies that would be input taxed.

Generally, the issue of a unit in a unit trust is a financial supply. Therefore, if the acquisition of the Land and FFE relates to the issue of the unit, then the acquisition of the Land and FFE will not be for a wholly creditable purpose.

Part B of Goods and Services Tax Ruling, Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) provides guidance on determining a connection between an acquisition and the making of supplies that would be input taxed. Although occurring concurrently, the acquisitions of the Land and FFE does not relate to the supplies of the units in the trusts despite the units being consideration for those acquisitions. Paragraph 119 of GSTR 2008/1 states:

For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

The acquisitions by the trusts directly relate to making the supplies under the lease. Therefore, the acquisitions do not relate to the issue of the units.

As the acquisitions are made for a wholly creditable purpose, the trusts are entitled to full input tax credits for the acquisitions of the Land and FFE respectively.

Question 3

As discussed above, an entity is entitled to full input tax credits when it makes an acquisition for a wholly creditable purpose. However, subsection 11-15(2) of the GST Act provides that an acquisition is not made for a creditable purpose to the extent that it relates to supplies that would be input taxed.

The acquisition by the entity of the Land under the lease will be for a partly creditable purpose as it will be used to make input taxed supplies; GST-free supplies and taxable supplies.

Goods and Services Tax Ruling, Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) provides guidance on methods that can be used for calculating input tax credits by providers of financial supplies. Paragraph 33 states:

Following the principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to:

· be fair and reasonable;

· reflect the intended use of that acquisition (or in the case of an adjustment, the actual use); and

· be appropriately documented in your individual circumstances

Paragraphs 93 and 94 of GSTR 2006/3 explains that measures which are based on inherent characteristics of the acquisition usually give a fair reflection of the use of the thing and floor space is given as an example of one such characteristic. The acquisition, by lease, of the Land by the entity relates in part to the sub-lease to the other tenants which is a taxable supply made by the entity. The entity may apportion the part of the lease which relates to the sub-lease on a fair and reasonable basis. In effect, this would give the entity full input tax credits in relation to that portion of the acquisition of the property.

It would be expected that the apportionment methodology used by the entity which utilises the a cost allocation process for allocating costs to business divisions within the entity's group would first exclude the portion of the lease costs which relate to the sub-lease to the other tenants prior to allocating the remainder to the business divisions.

Question 4

Section 129-20 of the GST Act provides that an acquisition which has a GST exclusive value of more than $500,000 has ten adjustment periods applying to that acquisition. The acquisitions, by the entity of the Land and FFE both exceed this amount and would therefore, each have ten adjustment periods. Paragraph 66 of GSTR 2006/3 states:

For the purpose of making adjustments under Division 129, the actual application is measured from the time of acquisition or importation until the end of the adjustment period. This means that the calculation of creditable purpose is a cumulative one, starting at the point of acquisition and ending at the end of each relevant adjustment period. This does not necessarily require the calculation of actual application to be the result of a continuous measurement of use. It will be sufficient to make a reasonable estimate based on a representative period, using one of the methods explained in paragraphs 90 to 130 of this Ruling.

The entity claimed input tax credits for the acquisition of the Land and FFE based on the recovery rate applied to the entity. The ten adjustment periods applying to the acquisitions would be considered under the entity's ordinary treatment of adjustments for changes in the extent of creditable purpose.

The effect of Division 132 of the GST Act is to take into account the previous denial of input tax credits as well as the impact of any adjustments in relation to the acquisition and then determine if there is a further entitlement to a decreasing adjustment when the thing acquired is sold. Paragraph 12 of Goods and Services Tax Ruling Goods and services tax: when does an entity have a decreasing adjustment under Division 132? (GSTR 2004/8) states:

Division 132 in effect treats the original acquisition as related, in part at least, to the later sale of the thing acquired. For example, if a thing is acquired and applied solely for making financial supplies with all input tax credits denied, and is subsequently sold for half the original acquisition price, Division 132 effectively gives you half the original input tax credit. It gives you a decreasing adjustment to effectively recover the input tax credits previously denied.

The sale of the Land and FFE would ordinarily result in an adjustment under Division 129 of the GST Act in the following adjustment period (usually ending 30 June each year). However, this adjustment is not required because of subsection 129-25(2) of the GST Act. Paragraph 44 of Goods and Services Tax Ruling Goods and Services Tax: Division 129 - making adjustments for changes in extent of creditable purpose (GSTR 2000/24) states:

If the disposal is one which gives rise to a decreasing adjustment under Division 132, then the adjustment period which preceded the disposal is the last adjustment period.

Therefore, there will not be any further adjustment periods in relation to the Land and FFE following the respective sales.

Question 5

As explained in GSTR 2004/8, Division 132 of the GST Act applies to allow an entity a decreasing adjustment when it makes a taxable supply of a thing for which it was not entitled to a full input tax credit (or had a later increasing adjustment) because the acquisition or application related to making financial supplies or was of a private or domestic nature. Division 132 of the GST Act effectively enables the entity to recover the input tax credits that it had previously been denied. Subsection 132-5(1) of the GST Act states:

(1) You have a decreasing adjustment under this Division if:

(a) you make a *taxable supply of a thing (or a supply of a thing that would have been a taxable supply had it not been *GST-free under Subdivision 38-J); and

(b) the supply is a supply by way of sale; and

(c) your acquisition, importation or subsequent *application of the thing, related solely or partly to making *financial supplies, or was solely or partly of a private or domestic nature.

When the entity sells the Land and FFE to the trusts respectively, it will be making taxable supplies of those things; the supplies are by way of sales and the acquisitions by the entity of the Land and FFE related partly to making financial supplies. Therefore, the entity will have a decreasing adjustment. The amount of the adjustment is calculated in accordance with subsection 132-5(2) of the GST Act with reference to the formula:

1 x Price x {1 - Adjusted input tax credit }

11 { Full input tax credit }

where:

adjusted input tax credit is:

(a) the amount of any input tax credit that was attributable to a tax period in respect of the acquisition or importation; minus

(b) the sum of:

(i) any *increasing adjustments, under Subdivision 19-C or Division 129, that were previously attributable to a tax period in respect of the acquisition or importation; and

(ii) any increasing adjustment under Division 131 that has been previously, is or will be attributable to a tax period in respect of the acquisition or importation; plus

(c) the sum of any *decreasing adjustments, under Subdivision 19-C or Division 129 or 133, that were previously attributable to a tax period in respect of the acquisition or importation.

full input tax credit is the amount of the input tax credit to which you would have been entitled for acquiring or importing the thing for the purpose of your *enterprise if:

(a) the acquisition or importation had been solely for a *creditable purpose; and

(b) in the case where the supply to you was a *taxable supply because of section 72-5 or 84-5 - the supply had been or is a *taxable supply under section 9-5.

price is the *price of the *taxable supply.

Paragraphs 56-84 of GSTR 2004/8 explains in detail the ATO view of what is included in the meaning of 'full input tax credit' in the formula in section 132-5 of the GST Act. As stated at paragraph 56 of GSTR 2004/8:

A question arises as to the level of identity required by Division 132 between the thing acquired and the thing subsequently sold.

The example at paragraph 79 of GSTR 2004/8 involves the modification (rather than repair or maintenance) of the thing being supplied, the property. The things being sold by the entity are the Land and the FFE.

Question 6

Division 72 of the GST Act provides that a supply to an associate may still be a taxable supply even though there is no consideration and that a supply to an associate for inadequate consideration is valued appropriately for GST purposes.

The trustee for both trusts is an associate of the entity as defined by section 195-1 of the GST Act.

As explained above, the sales by entity of the Land and FFE are taxable supplies under section 9-5 of the GST Act and are made for consideration. The consideration for the supply of the Land will be the units in the trust. The consideration for the supply of the FFE will be either units in the trust, money or debt. Therefore, section 72-5 of the GST Act will not apply to the sales by the entity.

Subsection 72-70(1) of the GST Act provides that the value of a supply to an associate for inadequate consideration is to be taken as the GST exclusive market value.

However if the supply is made to an associate which acquires the thing for a wholly creditable purpose, then Division 72 of the GST Act will not apply.

Therefore, even if the supplies of the Land and FFE by the entity to the respective trusts are for inadequate consideration, both trusts are making their acquisitions for a wholly creditable purpose and Division 72 of the GST Act will not apply.

When the trusts lease the Land and FFE back to the entity, the acquisitions by the entity will not be for a wholly creditable purpose, because the entity makes input taxed financial supplies. Therefore, if the Land or FFE is leased back at less than market value, subsection 72-70(1) of the GST Act will apply to ensure that the GST payable on the supply is calculated with reference to the market value.

Beginning at paragraph 140, GSTR 2001/6 explains the ATO view of market value and states at paragraph 141:

Market value is regarded as the price that would be negotiated at a specified time between a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller acting at arm's length in an appropriate market…

Whether the leases to back to the entity are for inadequate consideration will be a question of fact. It would not necessarily follow that the written down value of the FFE is the same as the market value.

The sale and leaseback of the Land is subject to the Operational Deed which alters the application of the lease agreement by removing or suspending certain obligations on the parties. You have advised that the lease will be with reference to the market value. Provided that the value of any obligations under the Operational Deed are considered when determining the market value of the lease of the Land back to the entity, then Division 72 of the GST Act would not apply.

Question 7

Division 156 of the GST Act modifies the normal attribution rules for supplies that are made on a periodic or progressive basis. Section 156-5 of the GST Act provides the GST payable on a supply which is made for a period or on a progressive basis and is for consideration that is to be provided on a progressive or periodic basis is attributable as if each progressive or periodic component of the supply were a separate supply.

Section 156-22 of the GST Act specifies that a supply or acquisition by way of lease, hire or similar arrangement is to be treated as a supply or acquisition that is made on a progressive or periodic basis.

Goods and Services Tax Ruling, Goods and services tax: Division 156 - supplies and acquisitions made on a progressive or periodic basis (GSTR 2000/35) explains the application of Division 156 of the GST Act and states, at paragraph 59:

Division 156 has the effect of treating each periodic or progressive component of the lease as if it were a separate supply or acquisition which must then be accounted for in accordance with the attribution rules contained in sections 29-5 and 29-10.

Application of the General Anti-Avoidance Rule

The object of Division 165 of the GST Act is to deter schemes that give an entity a GST benefit. If the dominant purpose or principal effect of a scheme is to give an entity such a benefit, the Commissioner may negate the benefit an entity gets from the scheme by declaring how much GST or refund would have been payable, and when it would have been payable, apart from the scheme. Subsection 165-5(1) of the GST Act outlines when the Division operates. It states:

165-5 When does this Division operate?

General rule

This Division operates if:

(a) an entity (the avoider) gets or got a *GST benefit from a *scheme; and

(b) the GST benefit is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the *GST law, the *wine tax law or the *luxury car tax law; and

(c) taking account of the matters described in section 165-15, it is reasonable to conclude that either:

(i) an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a *GST benefit from the scheme; or

(ii) the principal effect of the scheme, or of part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly; and

(d) the scheme:

(i) is a scheme that has been or is entered into on or after 2 December 1998; or

(ii) is a scheme that has been or is carried out or commenced on or after that day (other than a scheme that was entered into before that day).

Accordingly, for Division 165 of the GST Act to apply to the facts and circumstances you provided in your ruling application and the responses provided to the questionnaire issued by the Commissioner, three elements would need to be present:

· there is a 'scheme';

· a 'GST benefit' is obtained from the scheme; and

· the dominant purpose or principal effect of the scheme is to obtain the GST benefit identified.

Scheme

Subsection 165-10(2) of the GST Act exhaustively defines a 'scheme' as:

(a) any arrangement, agreement, understanding, promise or undertaking:

(i) whether it is express or implied; and

(ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or

(b) any scheme plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise'.

The arrangement that you have described in your private ruling application would constitute a scheme for the purposes of Division 165 of the GST Act. The scheme would, in general terms, consist of the following steps:

· The transfer of the Land currently owned by the entity to the trust;

· The transfer of FFE to the trust; and

· The leaseback of the Land from the trust to the entity.

GST Benefit

Under paragraph 165-10(1)(d) of the GST Act, a GST benefit includes a benefit where:

'all or part of an amount that is payable to the entity under this act apart from this Division is, or could reasonably be expected to be, payable earlier than it would have been apart from the scheme or part of the scheme'.

The facts outlined in your ruling request indicate that there may be a GST benefit arising from the proposed arrangement.

Dominant Purpose / Principal Effect

Division 165 of the GST Act must be considered on a case by case basis to determine whether it would be concluded that the dominant purpose or principal effect of the scheme would be to get a GST benefit. This requires an objective assessment of the scheme against the twelve matters set out in subsection 165-15(1) of the GST Act.

The ruling request indicates that there are significant commercial reasons for transferring the Land and the FFE to separate entities, which will be established and sit outside of the GST group. Therefore, the Commissioner considers that in the factual circumstances outlined in the ruling request, the dominant purpose of the scheme could not be said to be the obtaining of a GST benefit.

In summary, based on the information contained in the ruling request and further information provided to the Commissioner, it is considered that the scheme/arrangement described with its particular facts and circumstances, in particular relating to:

· the form and substance of the scheme;

· the manner in which the scheme was/will be carried out;

· the timing of the scheme;

· the period in which the scheme was/will be carried out;

· the overall change in the applicants financial position and

· the circumstances surrounding the scheme

will not be entered into or carried out with the dominant purpose or principal effect of securing a GST benefit and therefore Division 165 of the GST Act will not apply.