Edited version of your private ruling

Authorisation Number: 1012427168149

Ruling

Subject: GST & the sale of property

Question 1

Is Entity A making a taxable supply when it supplies the Site to Entity B (the Developer)?

Answer

Yes

Question 2

What is the valuation of the non-monetary consideration provided by the Developer for the site, to Entity A?

Answer

Please see detailed explanation

Question 3

When is the consideration for the supply of the site provided?

Answer

Please see detailed explanation

Question 4

Is the Developer making a taxable supply to Entity A when it supplies the Works?

Answer

Yes

Relevant facts and circumstances

Background

· Entity A has entered into a Contract of Sale to acquire certain land (the site) from Entity C as part of the Expansion Project.

· The Contract of Sale and relevant legislation obliges Entity A to complete certain capital works and to engage another entity to complete those capital works.

· Entity A has entered into a Contract of Sale to sell the Site to Entity B (the Developer).

· Entity A has entered into a Development Agreement on the same date for the development of land.

· Pursuant to the Development Agreement, the Developer must pay Entity A the First Payment, the Second Payment and the Other Payments (Additional payments) at various milestones, which will be used by Entity A to purchase the Site from Entity C.

· Further, the Developer must, at its own cost , effect the Works.

· The Developer will apply for a planning permit to develop the Site.

· If a planning permit is obtained, the Developer will settle purchase of the Site from Entity A and the Additional Payments are set off against the purchase price of the Site. Otherwise, the Developer may terminate the Development Agreement.

· If the Developer undertakes the Works and subsequently the Development Agreement is terminated (other than as a result of the default of the Developer), Entity A must refund to the Developer all Additional Payments the Developer has made under the Development Agreement and the costs the Developer has incurred in undertaking the Works.

· The Developer and Entity A account for GST on an accruals basis.

In an e-mail, Entity B's representative, provided the following clarification with regard to the information submitted in support of your ruling request:

· The Private Ruling Application stated that "The Land Acquisition Contract and the relevant legislation obliges Entity A to complete certain capital works (including the Works)...". The contract and the legislation is intended to be considered together to (a) impose the obligation on Entity A and (b) give Entity A the authority to undertake the works. The understanding of Entity A is that grant of the Land by Entity C can only practically be made upon completion of the Works, and authority to undertake the Works prior to final settlement is provided in condition 9 of the Contract of Sale between Entity C and Entity A. Further, Entity A may carry out works and improvements to Entity A's land.

· The Other Payments referred to in the Development Agreement are a contribution by the Developer to the Entity A in connection with additional works being undertaken by the Entity A to the particular area. This area is adjacent to the site of the Works but the additional works relating to the particular Area are not part of the Works being undertaken by the Developer. This is why the Other Payments are not set off from the balance payable by the Developer to Entity A under the Land Contract.

· The margin scheme is not applicable to the sale of the land from Entity C to Entity A.

You have provided documentation and diagrams in support of your application including:

· Contract of Sale between Entity C and Entity A

· Contract Of Sale between Entity A and Entity B (Purchaser);

· Development Agreement between Entity A and the Developer

Relevant legislative provisions

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

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

Reasons for decision

Question 1

Are you, Entity A, making a taxable supply when you supply the Site to the Developer?

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) outlines the requirements for a taxable supply:

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.

(Terms preceded by an *asterisk are defined in the GST Act.)

In your case, the supply of the Site is made in the course of an enterprise that you carry on, it is connected with Australia and you are registered for GST. Further, the supply is not GST-free or input taxed.

The remaining requirement is whether the supply is made for consideration?

Under section 195-1, 'consideration', for a supply or acquisition, means any consideration, within the meaning given by section 9-15 of the GST Act, in connection with the supply or acquisition. Subsection 9-15(1) provides that consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) 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 Goods and services tax: non-monetary consideration (GSTR 2001/6) explains how the GST Act applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, if it is non-monetary consideration).

Paragraph 12 of GSTR 2001/6 provides that a 'payment' is not limited to a payment of 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.

Paragraph 16 goes on to explain that by providing non-monetary consideration for a supply, you are in turn making a supply. 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.

Paragraph 19 explains that in most circumstances, when the parties to a transaction are acting at arm's 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, this method must produce a reasonable GST inclusive market value of the things exchanged.

Subsection 9-75(1) of the GST Act provides that the price is the sum of the monetary consideration and the non-monetary consideration.

In your case, the Contract of Sale (the Contract) entered into between you and the Developer states that the purchase price for the land is $xx plus GST.

The Contract deals with Settlement and states that:

Settlement must take place 14 days after the Settlement Conditions have been satisfied.

The Settlement conditions are defined in the Contract as:

· the vendor becoming the registered proprietor of the Land;

· the issue of a duplicate certificate of title for the Land;

· Practical Completion of all of the Works;

· the issuance of an Acceptable Planning Permit; and

· the vendor giving a Bank Guarantee to the purchaser.

The term 'Works' and Practical Completion are defined in the Development Agreement.

Further, the Contract provides for the purchaser of the Site to receive a credit for payments made under the Development Agreement.

The contract stipulates that the Entire Contract is embodied in the Contract of Sale and the Development Agreement. These contracts are interdependent.

The terms "Payments" and "Other Payments" are defined in the Development Agreement.

In summary, the clauses and definitions identified above indicate that the Developer will provide the following monetary and non-monetary consideration to Entity A:

· The purchase price of $xx plus GST (reduced by the First and Second Payment); and

· The Other Payments of $xx (in total); and

· The Developer will also perform the Works.

The definition of a taxable supply requires among other things, that you make a supply for consideration. There needs to be a supply, a payment and the necessary relationship between the supply and payment. Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is sufficient nexus between the supply and the payment as consideration. The same analysis applies in determining whether a good, service or thing is non-monetary consideration for a supply.

Paragraph 70 of GSTR 2001/6 refers to the High Court decision in Berry v. FC of T (1953) 89 CLR 653 and the meaning given to the term 'in connection with'. Kitto J 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'.

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.

Consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducements 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.

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 your case, there is a direct link between both the monetary and non-monetary consideration provided by the Developer for the supply of the Site. The receipt of the monetary payment and the Works has a substantial relation, in a practical business sense to that property. The Works also have economic value and independent identity.

The substance of the transaction supports this view. In particular:

· The Contract of Sale between the Entity C and Entity A and the relevant legislation requires Entity Al to complete certain capital works. Entity A will engage another entity to complete those capital works.

· The Contract of Sale between Entity A and the Developer and the Development Agreement are interdependent. If either the Contract of Sale or the Development Agreement is terminated, this will result in the other agreement being terminated

· If the Developer undertakes the Works and subsequently the Development Agreement is terminated (other than as a result of the default of the Developer), Entity A must refund to the Developer all Additional Payments the Developer has made under the Development Agreement and the costs the Developer has incurred in undertaking the Works.

· The Development Agreement states that Entity A and the Developer have agreed that in consideration for payment of the Price by the Developer, Entity A will sell to the Developer, and the Developer will buy from Entity A the Site.

· The Development Agreement goes on to say that the sale of the Site to the Developer is conditional upon the issue of an Acceptable Planning Permit, completion of the Works by the Developer and the creation of a certificate of title in respect of the Site.

Consequently, the supply of the Site is made for both monetary and non-monetary consideration and therefore you make a taxable supply to the developer when you supply the Site.

Question 2

What is the valuation of the non-monetary consideration provided by the Developer to Entity A for the site?

Where the consideration for a supply 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, we are of the view that the goods, services or other things exchanged are of equal GST inclusive market value.

Paragraph 144 of GSTR 2001/6 provides 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; or

· A professional appraisal.

Paragraph 155 goes on to say that where you are making a taxable supply and you are dealing with another party at arm's length, you can use a reasonable valuation method as determined between you and the other party. 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 this case, the market value of the Works could be determined using a cost plus margin method or using the market value of an identical good, service or thing.

Question 3

When is the consideration for the supply of the site provided?

Section 29-5 of the GST Act sets out the rules that determine the tax period in which an entity is required to attribute the GST payable on a taxable supply.

Subsection 29-5(1) of the GST Act determines the tax period in which an entity is required to attribute the GST payable when it accounts for GST on a non-cash basis.

Under this subsection the GST payable on a supply is attributable to:

· The tax period in which any of the consideration is received for the supply, or

· If before any of the consideration is received, an invoice is issued relating to the supply - the tax period during which the invoice is issued.

The Contract of Sale between Entity A and Entity B does not satisfy the tax invoice requirements under section 29-70(1) of the GST Act or the requirements in GSTR 2000/34 to be an invoice for GST purposes.

Where the attribution rules of subsection 29-5(1) of the GST Act are applicable, the entity is required to attribute all of the GST payable on its taxable supply of land to the tax period in which it receives the first instalment payment from the purchaser.

However, Goods and Services Tax Ruling GSTR 2000/28 Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a standard land contract (GSTR 2000/28), provides special rules on attributing the GST payable on a sale of land under a 'standard land contract'. Paragraph 25 of GSTR 2000/28 provides that the GST payable on a supply of land under a standard land contract is attributed to the tax period in which settlement occurs and not at the time when the deposit is paid.

For the purposes of GSTR 2000/28, paragraph 13 defines a standard land contract to be a written contract for the sale of land that provides for:

· The payment of a deposit that is either to be forfeited if the purchaser defaults or applied as consideration on settlement; and

· The payment of the balance of the purchase price upon settlement.

In your case, the Contract of Sale is not a Standard Land Contract. Both the Contract of Sale and the Development Agreement provide that a deposit is not payable in respect of this transaction.

The Contract of Sale outlines which documents comprise the Entire Contract. It states:

The purchaser acknowledges there are no conditions, warranties or other terms affecting this sale other than those embodied in:

· this contract; and

· the Development Agreement,

and the purchaser is not entitled to rely upon any representations made by or on behalf of the vendor except for those in this contract and the Development Agreement.

Consequently, we consider that the terms and conditions contained in the Development Agreement must be read concurrently with the Contract of Sale.

ATO Interpretative Decision ATO ID 2004/181 Goods and Services Tax: GST and attribution rules on a taxable supply of land where consideration is received (ATO ID 2004/181) provides that an agreement, which requires a purchaser to provide the purchase price to a vendor in the form of a number of instalments, as opposed to a deposit and a final payment upon settlement, is not a standard land contract.

In your case, the Developer will provide the following monetary and non-monetary consideration to the Entity A in exchange for the supply of the Site:

· The purchase price of $xx plus GST (reduced by the First and Second Payment); and

· The Other Payments of $xx (in total); and

· The Developer will also perform the Works.

The Development Agreement outlines how the payments are to be made:

Payments

· Payment of the First Payment

· The Developer must pay the First Payment to Entity A on execution of this deed.

· Payment of the Second Payment

· The Developer must pay to Entity A the Second Payment on the later of:

· Business Days after the Works Completion Date;

· the issuing of an Acceptable Planning Permit;

· the date Entity A gives the bank Guarantee to the Developer.

Other Payments

No later than 14 days after Practical Completion of the Works has been achieved, the Developer must pay to Entity A the sum of $xx plus GST on receipt of a valid tax invoice from Entity A.

On the date the Developer is required to pay the Balance (as defined in the Land Contract), the Developer must pay to Entity A the sum of $xx plus GST on receipt of a valid tax invoice.

In your case, attribution will be in accordance with the rules contained in section 29-5 of the GST Act and you must attribute all the GST payable on the taxable supply of the Site to the tax period in which the First Payment is made.

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.

With regard to the non-monetary component of the consideration for the supply of the Site, 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 scope of the project, it is conceivable that the market value of the non-monetary supplies may change at some time in the future. If this is the case, the above paragraph would be applicable.

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

With regard to the Works 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 the Works which may be undertaken by the Developer in the future.

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:

(1) 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. Paragraphs 92 to 94 explain that:

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 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.

Question 4

Are you, the Developer making a taxable supply when it supplies the Works to Entity A?

Section 9-5 outlines the requirements for a taxable supply. In your case, you are supplying Works to Entity A. These Works are defined in the Development Agreement between you and the Council.

Consequently you are making a supply. In return for the Works and other monetary payments, you will receive the Site. The supply is made in the course or furtherance of your enterprise, is connected with Australia and you are registered or required to be registered.

The only remaining requirement is that the supply of the Works is not GST-free or input taxed.

You have referred in your ruling application to Division 82 of the GST Act. Subsection 82-5 provides that supplies of rights to develop land do not constitute consideration in certain cases and states:

(1) The supply, by an *Australian government agency, of a right to develop land is not treated as*consideration for another supply if the other supply complies with requirements imposed by or under an *Australian law.

(2) It does not matter whether the other supply is made to the *Australian government agency.

(3) This section has effect despite section 9-15(which is about consideration).

The Decision Impact Statement issued in respect of the Commissioner of Taxation v Gloxinia Investments Ltd atf Gloxinia Unit Trust [2010] FCAFC 46 discusses development lease arrangements and Division 82.

Division 82 only applies where the works are undertaken in return for the supply by an Australian government agency of right to develop land, and where they satisfy the other requirements stipulated in subsections 82-5(1) and 82-10(1). Division 82 does not apply if the supply of the works is a condition of the sale or long-term lease of the land to the developer, rather than a condition of obtaining a right to develop the land.

In your case, practical completion of the Works is a Settlement Condition of the Contract of Sale. Consequently, Division 82 is not applicable in this case.

The supply of the Enabling Works by the Developer to Council is not input taxed or GST-free and is therefore a taxable supply.

Other

· The valuation of this supply is discussed in Question 2 above.

· Attribution is discussed in Question 3 above.