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Ruling

Subject: GST & Development Agreement

Question 1

Does Entity A make a taxable supply under the terms of the Agreement and Related Agreements, when it enters into an obligation to make various supplies to Entity B?

Answer

Yes.

Question 2

Which entity is the recipient of the taxable supplies outlined in question 1?

Answer

Entity B

Question 3

What is the consideration for the supplies made by Entity A to Entity B?

Answer

The consideration provided by Entity B is the supply of rights under the Agreement and Related Agreements.

Question 4

To which tax period should the GST payable on the taxable supplies be attributed?

Answer

The tax period in which the Agreement is signed.

Question 5

How is the consideration for the supplies to be valued?

Answer

As the consideration for the supplies made by Entity A to Entity B is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply. As the parties to the Agreement and Related Agreements are dealing at arms length, the things exchanged are of equal GST inclusive market value.

Relevant facts and circumstances

· Entity A is registered for GST.

· Entity A has negotiated with Entity B including various Related Parties.

· Entity A entered into the Agreement. The Agreement provides a framework for various arrangements under which Entity A will obtain access to an Area and construct, commission and operate facilities at that site.

· The parties to the Agreement are:

(a) Entity B; and

(b) Entity A

A number of parties executed the Agreement as Related Parties.

· Entity A has executed a number of Agreements to implement the Project. These include agreements for the grant of tenure over land, the construction of infrastructure, access to the land and other land access agreements.

· A number of Related Agreements were executed on the same date as the principal Agreement:

· The Agreement sets out arrangements for the construction in the future by Entity A of certain infrastructure and the payment by Entity A to Entity B of various contributions.

· Entity A and Entity B are not related and have been dealing with each other at arms length with respect to the negotiations.

· You have provided the Agreement and Related Agreements to support your ruling application.

Note

When we refer to Entity B, this includes the Related Parties to the Agreement.

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 Subsection 9-10(4)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-75(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 29-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Division 82

Reasons for decision

A supply will be taxable when it satisfies the requirements outlined in section 9-5 of the A New Tax System (Goods and Services Tax) Act of 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.

In your circumstances, requirements (b), (c) and (d) are satisfied and the supplies are not GST-free or input taxed.

A taxable supply cannot exist unless there is a supply for consideration. There are three questions that are relevant to determining this question:

· is there a supply

· is there consideration; and

· does the necessary relationship exist between the supply and the consideration?

Supply

The meaning of supply is contained in section 9-10 of the GST Act and is any form of supply whatsoever. Subsection 9-10(2) of the GST Act expands on the meaning of supply. This subsection provides that supplies include, but are not limited to:

· a supply of goods and services ;

· a creation, grant, transfer, assignment or surrender of any right;

· an entry into, or release from, an obligation to do anything.

Subsection 9-10(4) of the GST Act states further:

However, a supply does not include a supply of *money unless the money is provided as *consideration for a supply that is a supply of money.

Goods and Services Tax Ruling, GSTR 2006/9, Goods and services tax: supplies (GSTR2006/9), uses a number of propositions to assist in analysing a transaction to identify the supply or supplies made in a transaction.

Paragraph 65 of GSTR 2006/9 (Proposition 3) provides that a supply that contains a dominant part, but also includes something that is integral, ancillary or incidental to that part is a 'composite supply', being the supply of a single thing.

Proposition 4 discusses the situation where a transaction involves two or more supplies.

Paragraph 68 states:

68. However, if the recipient provides consideration in a non-monetary form, the consideration itself is a separate supply. In a transaction of this kind between two entities, there are two supplies, one going each way. As a result, each party to the transaction needs to account for any GST on the supply it makes, and each party needs to account for any input tax credit entitlement for the acquisition it makes.

Proposition 11 in GSTR 2006/9, provides that examining the agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom.

In your case, the structure of the arrangement entered into between Entity A and Entity B is contained in the Agreement and the Related Agreements. It is these documents which must be examined to determine the reciprocal relationships between the parties and the supplies which are being made.

The Agreement is the primary document which outlines the objectives of the arrangement and identifies the respective rights and obligations between the parties.

The Related Agreements give effect to the intentions of the parties by prescribing further rights and obligations between Entity A and the Related Parties.

Certain paragraphs of the Agreement provide a summary of the substantive supplies which Entity A will make to Entity B. There are also a number of ancillary supplies contained in the Agreement and Related Agreements which together with the substantive supplies form a composite supply.

Further, there are a number of obligations contained in the Agreement and Related Agreements which are considered to be terms of the arrangement and would not be considered to be substantive or ancillary supplies.

This ruling will not specifically identify the ancillary supplies or those clauses which are considered to be terms of the arrangement. We have, however, endeavoured to provide an indication of the substantive supplies contained in the Agreement and Related Agreements.

The substantive supplies include various Works and Infrastructure and Community Improvements. A schedule to the Agreement also identifies contributions to be made by Entity A and Entity B.

The Agreement further outlines the facilities which must be surrendered to Entity B on completion of construction.

The Related Agreements are an extension of the Agreement and further clarify or detail the supplies, rights and obligations contained in the Agreement.

Paragraphs 40 to 44C of Goods and Services Tax Ruling GSTR 2001/8, Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8), discuss differentiating between a mixed supply and a composite supply.

Relevantly, these paragraphs provide that where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. By having regard to the essential character or features of a transaction it can be ascertained whether a supply contains separately identifiable taxable and non-taxable parts or is a composite supply of one thing. It is a composite supply of one thing if one part of the supply should be regarded as being the dominant part, with other parts being integral, ancillary or incidental to that dominant part.

We have endeavoured to identify the substantive (or dominant) supplies in the arrangement. Things done to facilitate these supplies can be seen as part of the same supply. This is consistent with the principle referred to by the Full Federal Court in Westley Nominees Pty Ltd v. Coles Supermarkets Australia Pty Ltd (2006) that '…[w]here one can identify a supply as incidental to a principle supply, courts have generally treated the transaction as giving rise to one supply'. Further, paragraph 9-10(2)(h) of the GST Act provides that a supply includes 'any combination of any 2 or more of the matters' referred to in paragraphs 9-10(2)(a) to (g).

Consequently, we consider that the supplies made under the Agreement and Related Agreements constitute a composite supply under the arrangement. This composite supply is made by Entity A to Entity B for a 'bundle' of rights (consideration - to be discussed further below).

Consideration

A supply is a taxable supply if the supply is made for consideration. There must be some nexus or connection between a particular supply and particular consideration which is provided for that supply.

The definition of consideration in section 9-15 of the GST Act 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.

A 'payment is not limited to money. It includes a payment in a non-monetary or in an 'in kind' form, such as:

· Providing goods;

· Granting a right or performing a service (an act); and

· Entering into an obligation.

Further, many transactions involve parties entering into multiple obligations. The question arises as to whether those obligations are consideration (or additional consideration) for a taxable supply

Regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all the agreements entered into and the circumstances in which the agreements are made.

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 in connection with the supply of an obligation, we consider that the test is whether there is a link or nexus that provides a substantial relation between the substance of the obligation and the payment.

In Berry v FC of T (1953) 89 CLR 653, 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'.

After discussing the approaches taken by courts in various cases, paragraph 72 of GSTR 2001/6 concludes that the test as to whether there is 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.

In your case, the nexus between the supply and payment is underpinned by the Agreement and the Related Agreements. Although there are many conditions of the contract which cannot be classified as non-monetary consideration, there are significant rights which are of clear value to Entity A and which have independent identity. The particular rights granted by Entity B to Entity A go beyond merely defining or describing the transaction. These rights provide Entity A with significant control in the operation of the facilities both with regard to the infrastructure and third party access.

Entity B has provided Entity A with a number of rights under both the Agreement and the Related Agreements. An examination of both the Agreement and the Related Agreements establishes that these rights are 'in response to' or 'for the inducement' of the supplies made by Entity A and therefore constitute consideration for the supplies made by Entity B to Entity A.

The examination of both the Agreement and Related Agreements has also identified rights (consideration) provided by Entity B for the supplies made by Entity A to Entity B. These rights are in addition to the principle right provided to Entity A of the right to actually build the facilities it requires on Entity B's land.

We consider that the rights provided to Entity A under the Agreement and Related Agreements are 'bundled' to comprise the consideration for the supplies received from Entity A by Entity B. These rights include land tenure, the right to use the facilities constructed, the right to negotiate with third party users regarding access to the facilities and various access licences.

Value of supplies

The amount of GST on a taxable supply is 10% of the value of the taxable supply. Under subsection 9-75(1), the value of a taxable supply is the price x 10/11, where the price is the sum of:

a) so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply); and

b) so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration.

As the consideration for the supplies made by Entity A to Entity B is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply. Where parties are dealing at arm's length, as in this case, we are of the view that the things exchanged are of equal GST inclusive market value.

Paragraph 16 of GSTR 2001/6 states:

'By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply you make. If it is a taxable supply, you need to determine the GST inclusive market value of the consideration you receive for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you.

Further, Paragraph 19 of GSTR 2001/6 states:

We consider that, in most circumstances, when the parties to a transaction are acting at arms length, the goods, services or other things being exchanged are of equal market value. This value can be determined by using a reasonable valuation method that is agreed to by you and the other party. However, the method must produce a reasonable GST inclusive market value of the things exchanged.

The GST inclusive market value of consideration will be shown as the price on any tax invoice that the supplier issues, the onus for determining the GST inclusive market value of the consideration rests with the supplier (i.e. Entity A).

Paragraph 141 of GSTR 2001/6 states:

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. It is an objective test and not the subjective view of any one party.

Paragraph 144 goes on to say that you may determine the GST inclusive market value of non-monetary consideration for a taxable supply by applying a method that produces a reasonable GST inclusive market value of the consideration. Examples of reasonable methods include:

· The market value of an identical good, service or thing;

· The market value of a similar good, service or thing;

· The market value of the supply;

· A professional appraisal.

Other reasonable methods include using a reasonable valuation method as determined between you and the other party. Also, where both the supply and the consideration are difficult to value, you can calculate a reasonable market value for the non-monetary consideration (for example, a 'cost plus margin' method).

In your case, you are providing both monetary and non-monetary consideration to Entity B in return for the supply of rights by Entity B under the Agreement and Related Agreements.

The 'cost plus margin' may prove to be the most efficient method of valuing the non-monetary consideration. However, the Commissioner can only provide guidance on this issue.

In summary, as Entity A and Entity B are dealing at arms length, the things exchanged are of equal market value.

Attribution

The attribution rules are contained in Division 29 of the GST Act. Section 29-5(1) of the GST Act states:

(1) The GST payable by you on a *taxable supply is attributable to:

(a) the tax period in which any of the *consideration is received for the supply; or

(b) if, before any of the consideration is received, an*invoice is issued relating to the supply - the tax period in which the invoice is issued.

Paragraph 160 of GSTR 2001/6 provides that the GST Act does not specify the time when the market value of non-monetary consideration is to be ascertained for the purposes of working out the value of the supply under paragraph 9-75(1)(b). We consider that the time must be reasonable in the circumstances of a particular transaction. Depending on the circumstances, it may be:

· when parties enter into a binding agreement;

· when economic risk is transferred; or

· when a recipient assumes effective control.

The process of valuing non-monetary consideration can be done before or after the appropriate time as long as it reflects the GST inclusive value at the time when it should be determined.

Paragraph 164 of GSTR 2001/ 6 should be noted. It states:

A change in the market value of non-monetary consideration, after the time at which you need to establish the market value, is not an adjustment event for the purposes of paragraph 19-10(1)(b). It is not an event that has the effect of changing the consideration (that was determined earlier) for a supply or acquisition. Although the market value of the consideration changes at a later date, it does not have the effect of changing the originally agreed GST inclusive market value. It is not an adjustment event.

In your case, given the size and scope of the project, it is conceivable that the market value of the substantive supplies may change at some time in the future. If this is the case, the above paragraph would be applicable.

However, where additional substantive supplies are identified at a later stage which will change the consideration for a supply or acquisition, an adjustment event will arise.

Paragraph 170 goes on to say that an agreement providing for consideration to be paid in kind can be an invoice that triggers attribution of the GST payable and input tax credits. This is the case whether or not the market value of the consideration is stated in the agreement.

Paragraph 173 of GSTR 2001/6 provides that in applying the basic attribution rules to transactions where the consideration is non-monetary, you need to identify when the consideration is received or provided. This is a question of fact and depends on the terms of the agreement and all the circumstances.

If you account for GST on a non-cash basis, attribution is triggered fully when any of the consideration is received or provided before an invoice is issued.

In your case, attribution is triggered on the date that the Agreement is signed. This is the day on which there is a binding agreement between the parties and it is also the day on which Entity A becomes entitled to the rights provided by Entity B under the Agreement and Related Agreements (that is, this is the tax period during which Entity A first receives consideration for the supplies it makes to Entity B).

With regard to Infrastructure Improvements outlined in the Agreement, we acknowledge that it may be difficult to determine the value of the consideration, at the date of attribution, applicable to Infrastructure Improvement works which may or may not be undertaken by Entity A in the future and which are dependent on funding and approval by Entity B.

In this case, the Commissioner has issued a determination under paragraph 29-25(2)(e) which may be applicable. This determination can be applied in certain circumstances where the total consideration is unknown in the tax period when GST would normally be payable. This determination is explained in Schedule 5 to Goods and Services Tax Ruling, GSTR 2000/29, Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25.

Paragraph 29-25(2)(e) of the GST Act states:

(2) However, the Commissioner must not make a determination under this section unless satisfied that it is necessary to prevent the provisions of this Division and Chapter 4 applying in a way that is inappropriate in circumstances involving:

(e) a supply or acquisition occurring before the supplier or recipient knows the total consideration;

GSTR 2000/29 discusses this issue at paragraphs 92 -98.

This attribution rule is for supplies and acquisitions where some consideration is received (or provided), or an invoice is issued, but the total consideration for the supply or acquisition has not been ascertained because it depends on a future event or events. The determination does not apply if that event is entirely within the control of the supplier.

The effect of this particular attribution rule is to defer attribution of GST on the supply or entitlement to an input tax credit for the amount that can not be ascertained.

The supplier (Entity A) attributes GST payable to the extent that consideration is received (or provided), or an invoice issued. At the time the supplier (or recipient) knows the total consideration, GST payable on the taxable supply is attributable to the tax period in which the supplier (or recipient) first knows the total consideration but only to the extent that the GST has not been previously attributed to an earlier tax period.

In this situation, the Commissioner will treat a document as a tax invoice that shows only an interim amount payable instead of the total consideration. When the total amount of the consideration is known, a further tax invoice will be required by the recipient to attribute the input tax credit to the remainder of the consideration. The Commissioner will also treat this document as a tax invoice even though it may not show the total price.

Conclusion

The arrangement entered into between Entity A and Entity B is governed by the Agreement and Related Agreements. These agreements are interrelated and must be considered as a whole.

Entity A has undertaken to provide a number of supplies to Entity B which we consider comprise a composite supply. Entity B, in turn, has provided various rights to Entity A as consideration for these supplies. The supply and consideration are of equal value with attribution occurring on the date on which the Agreement is signed.

Other

Creditable Acquisitions

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

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

(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.

In your case, your acquisition from Entity B will be for a creditable purpose, the supply to you will be a taxable supply, you are providing consideration for the supply and you are registered for GST. Consequently, you are entitled to Input Tax Credits on any acquisition which you make from Entity B.