Edited version of your private ruling

Authorisation Number: 1012376487648

Ruling

Subject: GST treatment of supplies

Question 1

Is the provision of management services by your related entity, for which the management fee is consideration, a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Are your related entity's acquisitions of things, for the purposes of making the taxable supply of management services, fully creditable for the purposes of section 11-5 of the GST Act?

Answer

Yes, where the supply of the things to the entity are taxable supplies.

Question 3

Is the receipt of the assigned income part of the acquisition of the assignment of the income stream and therefore not subject to GST?

Answer

Yes. The entry into the swap contract and the assignment of the income stream are input taxed supplies. Amounts of money received pursuant to these supplies therefore relate to the acquisition of interests, and the acquisition of an interest is an input taxed financial supply. The receipt of money by your entities in relation to the supplies is not taxable.

Relevant facts and circumstances

You are registered for GST.

You are applying for a private ruling on behalf of related entities that you intend to create. Your application for private ruling is made on the basis that you are authorised to seek a private ruling for this proposed entity and any other entities that you may establish.

In particular, you intend to establish a separate entity special purpose vehicle that will be registered for GST (referred to here as SPV). You will also establish an entity (unrelated to SPV) referred to here as SPV Trust.

You have advised that all of the parties to the proposed arrangements will be registered for GST. You have also advised that they provide the goods or services exchanged for consideration in the course or furtherance of their enterprises, and that all the supplies made are connected with Australia.

You have provided a proposal/expression of interest (EOI) to an unrelated third party (the owner) in relation to properties that they own and operate. The owner intends to outsource the operation of the properties on a long term basis. The owner anticipates receiving a significant upfront payment.

Your EOI addressed the express requirements of the owner that the arrangement not involve a lease of the properties to you. It set out the legal requirements and financial options available for the proposed acquisition, refurbishment and operation of the properties (the project). It also set out your operational approach, refurbishment plans and future development approach.

The properties

The properties provide accommodation in a range of buildings and different configurations, including halls of residence and some freestanding townhouses. The properties have a mix of individual rooms and common rooms.

The relevant premises all operate under a set of facility rules. There are people available onsite for residents who need assistance.

The rent charged will remain at a level of providing affordable accommodation.

The arrangements

The key elements of the arrangements will involve the following:

· SPV agrees to manage and operate the properties for a specified term.

· SPV will enter into an agreement with the owner to operate and manage the properties. In return for the management services SPV will be paid a management fee (which will be funded by a portion of the accommodation charges collected from residents by the owner).

· The management fee (consideration) paid by the owner for the management services will be an arm's length charge reflective of market value. It will be determined on a commercial basis that allows SPV an opportunity to make a reasonable profit from the provision of the services (for example the cost of providing the services plus a commercial mark-up).

· SPV will then subcontract the management to an affiliate of theirs, and the affiliate will be the operator of the properties.

· The owner will continue to enter into residential accommodation agreements in respect of residential units within the properties (via SPV as their agent). All agreements for the supply of rental accommodation are entered into by SPV as agent for the owner.

· The owner will be entitled to retain a proportion of the gross rental stream received.

· The percentage of gross rental that the owner will retain is still under negotiation.

· The net rental income stream is the balance of rental amounts collected from residents less:

o GST (if any) on the accommodation supplies,

o the management fees described above, and

o the owner's retained proportion of the gross rent received.

· The balance of the net rental income stream is expected to vary over the term of the arrangement as accommodation fees and occupancy levels vary.

· The owner will enter into a swap contract with SPV regarding the balance of the net rental income stream. This swap contract will cover the whole term of the arrangement.

· The owner will pay the net rental stream to SPV, and in exchange SPV will pay the owner a fixed annual payment amount.

· Upon execution of the swap contract, the owner will have swapped their entitlement to the variable net rental for an entitlement to be paid a fixed annual payment amount by SPV.

· The owner will then assign that entitlement to receive the fixed annual payment to a trust (SPV Trust - part of your group but unrelated to SPV) for a single up-front payment made by that trust. This assignment will be made under an Assignment Deed.

· The intention of this arrangement is to allow the owner to capitalise into a lump sum your right to receive net rental from the properties.

· The documents outlining this agreement are yet to be finalised.

· The owner intends to ensure that the amounts charged to residents remain below 75% of the GST inclusive market value of the accommodation supplies for the purposes of section 38-250 of the GST Act. The owner will have the right to restrict or reverse any pricing movement inconsistent with their objectives of providing affordable accommodation. The impact on their GST-free status may be one reason why they would issue a direction to SPV restricting or reversing any price increase. If they issue a direction they would be liable to compensate SPV.

· The up-front payment will be calculated taking into account the value of the income stream being lower as a result of providing the affordable accommodation.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 11-5

Section 38-250

Section 40-5

A New Tax System (Goods and Services Tax) Regulations 1999

Subdivision 40-A

Reasons for decision

Question 1

Summary

SPV's provision of management services, for which the management fee is consideration, is a taxable supply to the owner under section 9-5 of the GST Act.

Detailed reasoning

When an entity makes a supply of goods or services for consideration in the course or furtherance of its enterprise, the entity is registered and the supply is connected with Australia, then the supply will be a taxable supply to the extent that it is not GST-free or input taxed. In your case, you intend for SPV to provide management services to the owner of the properties.

We consider that SPV will be carrying on an enterprise, which includes acting as an agent for the owner in relation to the supplies of accommodation in the properties. We consider that where this is done on a regular basis and in a business like manner (as would be expected in this arrangement) that this would constitute an enterprise, even though SPV intend to subcontract some activities to an affiliate of theirs. Therefore we consider that SPV will be entitled (or required) to register this enterprise, and the management activities will be done in the course or furtherance of this enterprise. You have advised that SPV will register for GST.

We also consider that the supplies of management services are connected with Australia.

Where SPV receives consideration that is in connection with that supply of management services we consider that the supply will be a taxable supply.

The circumstances do not demonstrate that the supply of management services would be eligible to be treated as GST-free or input taxed under the GST Act.

Question 2

Summary

SPV's acquisitions of things, for the purposes of making the taxable supply of management services, are creditable acquisitions for the purposes of section 11-5 of the GST Act (where the supplies to it are taxable supplies).

Detailed reasoning

Where SPV acquires things in order to make those taxable supplies of management services it is necessary to consider whether the things acquired are creditable acquisitions (and therefore whether SPV is entitled to input tax credits in relation to these acquisitions).

SPV will make a creditable acquisition under section 11-5 of the GST Act where supplies are made to it that are taxable supplies, and those supplies are acquired for a creditable purpose (and SPV provides or is liable to provide consideration for the supply).

Section 11-15 of the GST Act explains the meaning of creditable purpose. An acquisition will be for a creditable purpose as long as the acquisition does not relate to making supplies that are input taxed (and the acquisition is not of a private or domestic nature).

As considered at question 1, SPV's supply of management services would be taxable supplies in the circumstances described. Therefore acquisitions made in the course of its enterprise in relation to these supplies will be for a creditable purpose. Where SPV is the recipient of taxable supplies it will therefore make creditable acquisitions.

Question 3

Summary

The receipt of the assigned income is part of the acquisition of the assignment of the income stream and therefore not subject to GST.

The entry into the swap contract and the assignment of the income stream are input taxed supplies. Amounts of money received pursuant to these supplies therefore relate to the acquisition of interests, and the acquisition of an interest is an input taxed financial supply. The receipt of money by your entities in relation to the supplies is not taxable.

Detailed reasoning

Section 40-5 of the GST Act provides that a financial supply is input taxed, and that financial supply has the meaning given by the regulations. Regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST regulations, regulations) explains what supplies are financial supplies.

The provision, acquisition or disposal of an interest mentioned in sub-regulation (3) or (4) is a financial supply if the requirements of sub-regulation 40-5.09(1) are met. The requirements of sub-regulation 40-5.09(1) are met where the disposal is for consideration, in the course or furtherance of an enterprise and connected with Australia, and the supplier is registered or required to be registered and a financial supply provider in relation to the supply of the interest.

The structure of the arrangement is that the owner of the properties enters a swap contract with SPV to exchange their variable right to the net rental income stream for a fixed annual payment amount. The swap contract will be entered into at the commencement of the arrangement, and will cover the full term of the project or arrangement. The owner then assigns their entitlement to this fixed annual payment (representing the net rental income stream) to the SPV Trust in exchange for a single up-front payment.

Put simply, the swap contract converts the variable net income stream to a fixed annual payment, and the owner then assigns this to another entity for a single upfront payment.

Swap contract arrangement

We consider that the owner of the properties has a presently existing right to receive rental payments for the term of their leases with occupants. This presently existing right to the payment stream under a current lease is property and an interest in debt for the purposes of the GST Regulations), in particular regulation 40-5.02. A right to future property is also an interest for the purposes of regulation 40-5.02.

Under the swap contract SPV receives this variable right in exchange for giving a fixed annual payment. A swap is an exchange of one entitlement or obligation for another. In these circumstances, it is the exchange of an entitlement to a variable amount for a fixed annual payment. In these circumstances it is a financial instrument whose value is tied to, or derived from, an underlying security, commodity, liability etc (being the relevant property). The value of the swap is determined by (or derived from) the value of the net rental income stream. This in turn is determined by the value of supplies of the underlying property.

Under the Dictionary for the GST Regulations 'derivative' means an agreement or instrument, the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate. We consider that the swap contract is an agreement or instrument the value of which depends on the value of underlying supplies of accommodation, and is therefore a type of derivative. This view is supported by Goods and Services Tax Ruling GSTR 2002/2.

An interest is anything that is recognised at law or in equity as property in any form (see regulation 40-5.02). Item 11 of the table in regulation 40-5.09(3) lists a 'derivative' as a type of interest, the provision, acquisition or disposal of which will be an input taxed supply.

Therefore under the swap contract SPV (and also the owner) have provided or disposed of a financial interest in return for another financial interest and both have also acquired financial interests.

SPV's provision of the interest under the swap contract will be a financial supply where the requirements of sub-regulation 40-5.09(1) are met.

We consider that the supply is in the course or furtherance of SPV's enterprise and is connected with Australia. The supply is also for consideration. The consideration SPV gives for entering into the swap contract and receiving the variable entitlement to the net rental income stream is the fixed annual payment that the owner provides in exchange. We consider that on the basis of the information provided the requirements of sub-regulation 40-5.09(1) would also be met by the owner in relation to their corresponding supply.

Therefore the amounts SPV receives, where the amounts represent arm's length consideration for the particular supply, will be appropriately characterised as consideration for the input taxed financial supplies. SPV therefore does not pay GST on the amount (representing the net rental income stream) that it receives under the swap contract.

In other words, the amounts SPV receives are in respect of the input taxed financial supplies made and acquired. Therefore no GST is payable on these supplies.

Receipt of entitlement to fixed annual payments

Under a further step in the arrangements, SPV Trust then receives from the owner an assignment of their entitlement to the fixed annual payments in exchange for a single upfront payment. We consider that these arrangements also result in input taxed financial supplies being made.

SPV Trust is assigned the owner's entitlement to the net rental payments (once the owner's entitlement has been exchanged or converted to a fixed annual amount for the rental payments). When the owner assigns this converted interest to SPV Trust this is again the provision or disposal of an interest. The entitlement to the fixed annual payment still represents the entitlement to the rental income stream (a proprietary interest) and has not lost its character as such even though the amount has been effectively 'securitised' under the swap contract.

The entitlement to the fixed annual payment amount also has the character of an interest received under a derivative. The interest is therefore an interest under sub-regulation 40-5.09(3). The provision, acquisition or disposal of an interest may be covered by more than one item in sub-regulation 40-5.09(3). It need only satisfy one item to be a financial supply, but it may be classified under more than one item.

When this interest is assigned this is again the provision or disposal of an interest. SPV Trust also acquires the interest. The provision, acquisition or disposal of the interest is a financial supply where the requirements of regulation 40-5.09 are met. We have previously considered that your entities (and the owner) meet these requirements.

For this part of the arrangement the assignment is also for consideration. The consideration is the single upfront payment made by SPV Trust. As SPV Trust also acquires an interest, this is also a financial supply. The amounts of fixed annual payments received are consideration for this supply. Therefore the supplies made in the arrangement are financial supplies and are input taxed for GST purposes. No GST is payable on these supplies.

Only payments that are directly connected to these supplies can be characterised as consideration for the financial supplies. For example, the parties need to ensure that the amount appropriately represents arm's length consideration for the supplies, and only consideration for those supplies. Where the payment also, or more directly, relates to any other supplies (for example a supply of additional rights or a supply in relation to any other things such as refurbishment works) it will not be consideration for the input taxed financial supply. Rather, it will be characterised as consideration for those other supplies, and the GST treatment of those supplies need to be considered separately.

Access to input tax credits (or reduced input tax credits) for financial supplies

Normally where an entity makes an input taxed supply it does not make creditable acquisitions to the extent that they relate to making the input taxed supplies. However, there are some exceptions to this general rule. In particular, an acquisition is not treated as relating to supplies that would be input taxed if the only reason it would be treated as input taxed is because it relates to making financial supplies and the entity does not exceed the financial acquisitions threshold (section 11-15(4) of the GST Act. See also paragraph 11 of GSTR 2002/2).

That is, if an entity does not exceed the financial acquisitions threshold, it may be entitled to input tax credits under Division 11.

An entity exceeds the financial acquisitions threshold if it makes (or is likely to make) financial acquisitions where the input tax credits related to making those acquisitions would exceed the lesser of:

· $50,000 or such other amount specified in the regulations; or

· 10% of the total amount of input tax credits to which the entity would be entitled.

Where the entity exceeds either of these levels, it exceeds the financial acquisitions threshold. If it exceeds the financial acquisitions threshold, only reduced input tax credits are available for specific acquisitions (reduced credit acquisitions) and only to the extent that the acquisition is for a creditable purpose.

Similar to the discussion above, it is very important that any amounts considered as relating to input taxed financial supplies are properly characterised as relating to those supplies, rather than to any other supplies.