Edited version of your private ruling

Authorisation Number: 1012429845281

Ruling

Subject: GST Joint Ventures and the application of subsection 51-30(2) of the GST Act

Issue 1 - Project Agreement

Question 1

· Are you making taxable supplies by granting the Equivalent Rights under a specified agreement (Project Agreement) to the participants in the joint ventures (JV Participants)?

Answer

· Yes. You are making supplies to the JV Participants by granting the Equivalent Rights under the Project Agreement, but under subsection 51-30(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)¹, these supplies are treated as if they were not taxable supplies.

Question 2

· Are the payments under the specified subclauses of the Project Agreement consideration paid to you for a supply?

Answer

· Yes, the payments represent consideration for your supplies of the Equivalent Rights.

Question 3

· If you are making taxable supplies by granting the Equivalent Rights, does subsection 51-30(2) apply so that the supplies are treated as if they were not taxable supplies?

Answer

· Yes, subsection 51-30(2) operates to treat what would otherwise be taxable supplies made by you as if they were not taxable supplies.

Question 4

· Are you, in your capacity as joint venture operator (JV Operator) entitled to input tax credits for the corresponding acquisition of the Equivalent Rights made by the individual JV Participants?

Answer

· No. The supplies of the Equivalent Rights by you are not treated as taxable supplies by virtue of subsection 51-30(2) and therefore the corresponding acquisitions by the JV participants do not give rise to entitlements to input tax credits.

Question 5

· Are the JV Participants making taxable supplies when, under the Project Agreement, they undertake to be bound by the Equivalent Obligations (and to procure you, as JV Operator, to perform these Equivalent Obligations)?

· If so, does subsection 51-30(2) apply so that the supplies are treated as if they were not taxable supplies?

Answer

· No, in this instance the supplies are not made for consideration and therefore are not taxable supplies.

· Not applicable.

Issue 2 - Subleases

Question 1

· Are the supplies you make to the JV Participants under each of the Subleases excluded from being taxable supplies by subsection 51-30(2)?

Answer

· Yes, the supplies you make to the JV Participants under each of the Subleases are excluded from being taxable supplies by subsection 51-30(2).

This ruling applies for the following periods:

From the time the ruling is issued.

Relevant facts and circumstances

Project Agreement

You and a number of other entities have agreed to carry out collaboratively a specified Project and for this purpose you have formed a number of joint ventures to be effective from the date a final investment decision is made for the Project. These joint ventures are registered with the Australian Taxation Office (ATO) as GST joint ventures.

The parties to the Project established the joint ventures by entering into individual Joint Operating Agreements covering each specific arrangement. Under the Joint Operating Agreements, the parties, other than you, have 'Participating Interest' and you are the designated JV Operator. The Joint Operating Agreements allow for the parties to transfer their Participating Interest.

You have agreed to a framework with different third parties for various arrangements under which you will obtain access to specified locations to carry out the project, including by way of lease over relevant sites.

The parties to the Project have executed the Project Agreement to be effective on the date the final investment decision is taken for the Project. The Project Agreement broadly transfers the rights and obligations entered by you, in your own right, to the other Project Participants (in their capacity as JV Participants).

The parties to the Project Agreement (you as Landlord and the other parties as Tenants) also executed on a specified date a number of Subleases associated with the joint venture arrangements. These Subleases were executed to replace similar, but defective, agreements initially executed on a previous date.

The final investment decision about the Project was taken on a specified date.

The parties to the Project Agreement can only transfer all or any part of their interest in that Agreement as part of the transfer of their corresponding Participating Interest under and in accordance with the relevant Joint Operating Agreements.

One party to the Project, with the consent of the others, has assigned to other entities a proportionate interest of its rights, title and interest in the Project Agreement in conjunction with the transfer of its corresponding Participating Interest in and under the relevant Joint Operating Agreements.

Each of the new Participants also became parties to the Subleases (by way of Deed of Assignment and Assumption).

Under the Project Agreement:

· You grant to the other parties the Equivalent Rights and the other parties agree to be bound by the Equivalent Obligations.

· The JV participants agree that the Equivalent Rights and Subleases will be held as joint venture property.

· The parties agree for you, as JV Operator, to exercise the Equivalent Rights and perform the Equivalent Obligations.

Equivalent Rights are the rights powers and privileges equivalent to and for the same duration (less one day) as the rights enjoyed by you in your own right pursuant to specified agreements with third parties.

Equivalent Obligations are the obligations and liabilities equivalent to and for the same duration (less one day) as those applicable to you under specified agreements with third parties.

Specified subclauses of the Project Agreement states that the Joint Venturers of identified joint venture arrangements must (to the extent of their respective participating interests in the Joint Ventures) pay the Reimbursement Amounts (as defined in the Project Agreement) to you from time to time.

A specified subclause of the Project Agreement provides for you to charge the JV Participants of an identified joint venture arrangement any or all liability that you incur after a specified date under and in implementation of specified Agreements (as defined in the Project Agreement) to facilitate the Project as a whole.

Another specified subclause of the Project Agreement provides for you to charge the JV Participants of indentified joint venture arrangements a proportion of the costs you incur in relation to a specified Agreement and certain approvals (as defined in the Project Agreement).

A specified clause of the Project Agreement outlines the mechanism that is to be used for payments.

Subleases

The Subleases provide the mechanism for the complete sites leased by you to carry out the project to be apportioned (both physically and in terms of cost sharing) amongst the different joint ventures involved in the Project.

Each Sublease indicates, in the recitals, that the Sublease is entered into by the tenants in accordance with the relevant Joint Venture for use in 'joint operations' and that the 'rights of the persons comprising the Tenant' under the Sublease will form part of the joint property of the relevant joint venture. (You have advised that the term joint operating agreement, or its abbreviation, is used interchangeably with the term joint venture.)

The Subleases are addressed in the Project Agreement with the relevant joint venture (that is, the operator and participants) expressly recognising the relevant Sublease is held as joint venture property.

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 Section 9-15,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-25,

A New Tax System (Goods and Services Tax) Act 1999 Section 51-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 51-7,

A New Tax System (Goods and Services Tax) Act 1999 Section 51-30,

A New Tax System (Goods and Services Tax) Act 1999 Section 51-35 and

A New Tax System (Goods and Services Tax) Act 1999 Section 184-1.

Reasons for decision

Issue 1 Questions 1 & 2

1. Are you making taxable supplies by granting the Equivalent Rights under the Project Agreement to the JV Participants?

2. Are the payments under the specified subclauses of the Project Agreement consideration paid to you for a supply?

Summary

1. You are making supplies to the JV Participants by granting the Equivalent Rights under the Project Agreement, but under subsection 51-30(2) of the GST Act, these supplies are treated as if they were not taxable supplies.

2. The payments represent consideration for your supplies of the Equivalent Rights.

Detailed reasoning

The definition of supply at paragraph 9-10(2)(e) includes the creation, grant, transfer, assignment or surrender of any right. Therefore the granting of Equivalent Rights by you constitutes a supply for GST purposes. Under the normal rules, this supply will be taxable if the requirements of section 9-5 are met.

You make a taxable supply under section 9-5 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. It follows that if the supplies are made for consideration, they will be taxable supplies under section 9-5 unless any special rules in the GST Act apply to change the status of what may be prima facie a taxable supply.

Consideration as defined at section 9-15 can be monetary and non-monetary. The definition of consideration includes at subsection 9-15(1):

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

(b) any payment, or any act of forbearance, in response to or for the inducement of a supply of anything.

Furthermore, for there to be a supply for consideration there must be a sufficient nexus between a particular supply and a particular payment provided, or act or forbearance performed, for that supply.

It follows that there are two elements to the definition of consideration. The first is the payment by one entity to another or the performance of an act, or forbearance, by one entity in satisfaction of a promise to another. The second element is the nexus that must be established between the payment, act or forbearance and a supply.

In the present case, the Project Agreement prescribes enforceable obligations on the parties which, in fact, enable the implementation of the arrangements proposed in the Joint Operating Agreements. For your supply of the Equivalent Rights, the Project Agreement provides for you to seek monetary payment from the individual JV Participants (which the Participants must then pay) in relation to the following;

· Reimbursement Amounts,

· Liability in connection with certain specified Agreements, and.

· Liability in connection with a specified Agreement and certain approvals.

In Rowe & Maw v Customs and Excise Commissioners [1975] 2 ALL ER 444, the Queen's Bench Division of the United Kingdom High Court examined the situation where goods or services were supplied to a solicitor to enable him effectively to perform services he supplied to a client. The Court found that in such case, in whatever form the solicitor recovers from his client his expenditure for the goods or services supplied to him, whether as a separately itemised expense or as part of an inclusive overall fee, value added tax was payable because the payment was part of the consideration which the client paid for the service supplied by the solicitor. The Court also found that the same principles would apply to the case of any other professional man or agent.

Applying the above principles, when you seek monetary payments that represent the reimbursement of disbursements made in the first instance by you to obtain the rights now being transferred, the payments will constitute consideration for the supply of the rights by you to the individual JV Participants (see paragraph 49 of Goods and Services Tax Ruling GSTR 2000/37, 'Goods and services tax: agency relationships and the application of the law'). In this instance, there is a clear nexus between the supply of the rights by you and the 'reimbursements'.

Furthermore, under the Project Agreement, in return for the Equivalent Rights, the individual JV Participants enter into an obligation to tolerate an act or situation and to procure you to perform the tolerated act (that is, the undertaking to be bound by the Equivalent Obligations and to procure you, as JV Operator, to perform these Obligations).

The entry into this obligation is potentially an act in response to, or for the inducement, of a supply of anything under paragraph 9-15(1)(b) and consequently, can possibly represent (non-monetary) consideration for the supply of the Equivalent Rights.

The ATO view on the treatment of non-monetary consideration for GST purposes is addressed in Goods and Services Tax Ruling GSTR 2001/6, 'Goods and services tax: non-monetary consideration'. Paragraph 81 of GSTR 2001/6 states that for a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. This is further explained in paragraphs 83 and 84 of GSTR 2001/6 as follows:

83. Many transactions involve exchanging various rights and obligations between the parties to the transaction. In particular, the true character of the transaction may characterise the payment as a condition of the contract rather than the provision of non-monetary consideration. For example, in many cases, agreeing to enter into a contract to receive a supply for a specific period of time is not non-monetary consideration for that supply.

84. Also, subject to the terms of the agreement, transactions will often involve a supply made only for monetary consideration. In these circumstances, obligations entered into as part of the transaction by the entity that is liable to provide the money will not be separate parts of the consideration for the supply. Similarly, where the transaction in substance involves a supply made for a thing that is non-monetary consideration, the obligations to provide that thing will not constitute separate parts of the consideration.

In this case, the JV Participants undertake to be bound by the Equivalent Obligations and to procure you, as JV Operator, to perform these obligations. This undertaking by the JV Participants constitutes an identified obligation into which the individual JV Participants entered under the Project Agreement.

The undertaking by the JV Participants is a condition of the contract under the Project Agreement, effectively giving force to the arrangements agreed to by the parties under the relevant Joint Operating Agreement. As such, on its own, this undertaking (being the obligation entered into by the JV Participants) does not have economic value and independent identity. It follows that the entry into the obligation by the JV Participants does not constitute non-monetary consideration for your supplies.

In conclusion, the grant of the Equivalent Rights' by you to the individual JV Participants satisfies all the requirements of section 9-5 as follows:

· you make the supply for consideration; and

· you make the supply in the course of carrying on or in furtherance of its enterprise; and

· the granting of the rights is done through the Project Agreement as executed in Australia and therefore the supply is connected with Australia; and

· you are registered for GST.

In addition, in your circumstances the supply is not GST-free or input taxed.

It follows that in granting the Equivalent Rights, you would normally be making taxable supplies.

However, as you are the nominated JV Operator for the relevant joint ventures, it needs to be considered whether subsection 51-30(2) operates such that the supplies are treated as if they were not taxable supplies (see below).

Issue 1 Question 3

If you are making taxable supplies by granting the Equivalent Rights, does subsection 51-30(2) apply so that the supplies are treated as if they were not taxable supplies?

Summary

Subsection 51-30(2) operates to treat what would otherwise be taxable supplies made by you as if they were not taxable supplies.

Detailed reasoning

Subsection 51-30(2) can only apply if the joint ventures established under the Joint Operating Agreements are GST joint ventures as defined in the GST Act. As explained at paragraph 8 of Goods and services tax GSTR 2004/2, 'Goods and services tax: What is a joint venture for GST Purposes?', a joint venture that meets the requirements under section 51-5 is a GST joint venture.

In this instance, the arrangements to which the parties agreed under the relevant Joint Operating Agreements satisfy all the requirements of section 51-5 and consequently constitute GST joint ventures as defined.

Subsection 51-30(2) provides that a supply that the joint venture operator of a GST joint venture makes is treated as if it were not a taxable supply if:

· it is made to another entity that is a participant in the joint venture; and

· the participant acquired the thing supplied for consumption, use or supply in the course of the activities for which the joint venture was entered into.

The ATO view on subsection 51-30(2) is explained in Goods and Services Tax Determination GSTD 2004/2, 'Goods and services tax: are all supplies made by the entity nominated as the joint venture operator to entities that are participants in the GST joint venture to be treated as if they are not taxable supplies?'. We consider that subsection 51-30(2) does not apply to all supplies made by an entity that is nominated as the joint venture operator to an entity that is a participant in the joint venture. In particular, it does not apply to supplies that are made by the entity in a capacity other than as joint venture operator or that are made to an entity in a capacity other than as a participant in the joint venture.

In the present case, the parties to the Project established the above mentioned joint ventures by entering into individual Joint Operating Agreements under which the other parties are the JV Participants and you, while not a participant, are the designated JV Operator.

The parties to the Joint Operating Agreements then entered into the Project Agreement on the following terms, among others:

· you, in your individual capacity (as 'principal') and not as operator to any of the Joint Operating Agreements; and

· the other parties, in their individual capacity as JV participants in each of the Joint Operating Agreements to which they are each a party.

Notwithstanding the wording of the Project Agreement, the Joint Operating Agreements and the Project Agreement became effective concurrently on the date the final investment decision was taken and from that date your role, as an entity, inherently encompasses that of joint venture operator.

The term 'entity' for GST purposes is defined at section 184-1. Subsection 184-1(3) provides that a legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity.

The definition of entity at section 184-1, however, does not include a joint venture (nor by extension a joint venture operator or a participant in a joint venture). Accordingly, as explained at paragraph 7 of GSTR 2004/2, a joint venture cannot itself make supplies or acquisitions. As a joint venture operator of a GST joint venture is not an entity by definition, it follows that such an operator is not a distinct entity from the legal person nominated for that role under paragraph 51-5(ea). Similarly, a participant in a GST joint venture is not a distinct entity from the legal person that satisfies the requirements of section 51-7.

However, for GST purposes, Division 51 allows, in certain circumstances, a joint venture to be treated as if it was an entity (a GST joint venture) to avoid the reporting of transactions between members of the joint venture in carrying out the arrangement for which the joint venture is entered into. In particular, the explanatory memorandum to the A New Tax System (Goods and Services Tax) Bill 1999 states at paragraph 6.24 that:

Companies may operate together in mining activities in a joint venture with the aim to achieve certain things. For example, several mining companies may jointly survey for mineral deposits. The companies that are members of the joint venture may supply things to each other within the joint venture. Under the general rules, one company would pay GST on the supply of the thing and another participant of the joint venture would be entitled to the input tax credit for the acquisition of the thing. Such supplies and acquisitions are therefore akin to transactions made within an entity. For this reason Division 51 gives you the opportunity to separately register a joint venture for GST Purposes. Separately registered joint ventures are GST joint ventures.

It follows that Division 51 applies only to transactions in which joint venturers engage in the course of carrying through the agreement giving rise to the joint venture. As explained in GSTD 2004/2, subsection 51-30(2) does not apply to all supplies made by the entity nominated as joint venture operator. It applies only to supplies an entity makes, in its 'capacity' as joint venture operator, to another entity, in its 'capacity' as a participant in the GST joint venture. This will be the case where all the requirements of subsection 51-30(2) are met, that is, it is an entity's fulfilment of the conditions of subsection 51-30(2) that causes the entity to be acting in the capacity of joint venture operator, not the prescribed terms of a contractual agreement..

When the principles discussed above are considered in light of your circumstances, the following apply:

· As discussed above, you are making supplies in granting the Equivalent Rights under the Project Agreement and you are doing so as an entity that is inherently the nominated joint venture operator. (This is so notwithstanding the fact that under the terms of the Project Agreement the parties have agreed that you entered into the agreement in your individual capacity as 'principal' and not as operator to any of the Joint Operating Agreements.)

· The supplies are made to the JV Participants and as such, paragraph 51-30(2)(a) is met.

· Additionally, as stated in the Project Agreement, the JV Participants acquired these rights for use in the course of activities for which the relevant Joint Operating Agreements were entered into and therefore paragraph 51-30(2)(b) is also met.

Accordingly, the requirements of subsection 51-30(2) are met and as such the supplies of the Equivalent Rights by you to the JV Participants are treated as if they were not taxable supplies.

Issue 1 Question 4

Are you, in your capacity as JV Operator entitled to input tax credits for the corresponding acquisition of the Equivalent Rights made by the individual JV Participants?

Summary

The supplies of the Equivalent Rights by you are not treated as taxable supplies by virtue of subsection 51-30(2) and therefore the corresponding acquisitions by the JV participants do not give rise to entitlements to input tax credits.

Detailed reasoning

Subsection 51-35(1) provides that if the joint venture operator of a GST joint venture makes a creditable acquisition on behalf of another entity that is a participant in the joint venture, in the course of activities for which the joint venture was entered into:

· the joint venture operator is entitled to the input tax credit for the acquisition or importation; and

· the participant is not entitled to the input tax credit on the acquisition or importation.

This section has the effect despite sections 11-20 and 15-15, which are about who is entitled to input tax credits (subsection 51-35(2).

As explained above, by virtue of subsection 51-30(2), the supplies of Equivalent Rights by you to the JV Participants are not treated as taxable supplies and therefore, conversely, no entitlements for input tax credits arise from these acquisitions. Furthermore, as no GST is payable on those supplies, even if an entitlement to input tax credits did arise, the amount of input tax credits for the acquisitions would have been nil under section 11-25.

Issue 1 Question 5

Are the JV Participants making taxable supplies when, under the Project Agreement, they undertake to be bound by the Equivalent Obligations (and to procure you, as JV Operator, to perform these Equivalent Obligations)?

Summary

In this instance the supplies are not made for consideration and therefore are not taxable supplies.

Detailed reasoning

The meaning of 'supply' at section 9-10 includes at paragraph (2)(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation.

Under the terms of the Project Agreement, the JV Participants undertake to be bound by the Equivalent Obligations and to procure you, as JV Operator, to perform these obligations. This undertaking by the JV Participants constitutes an obligation into which the individual JV Participants entered and accordingly is a supply under paragraph 9-10(2)(g). For this supply to be taxable, the JV Participants, pursuant to section 9-5, must, among other things, be making the supply for consideration.

As explained before, the undertaking by the JV Participants is a condition of the contract under the Project Agreement, effectively giving force to the arrangement agreed to by the parties under the specified Joint Operating Agreements. As such, on its own, this undertaking (being the obligation entered into by the JV Participants) does not have economic value and independent identity.

It follows that while the JV Participants are making supplies (within the definition of 'supply' in the GST Act) by agreeing to be bound by the Equivalent Obligations (and to procure you, as JV Operator, to perform these Obligations); these supplies are not made for consideration. Rather, the JV Participants are agreeing to a contractual obligation created by the terms of the contractual agreement between them and you under the Project Agreement. The contractual performance to which the parties agreed under the Project Agreement is the grant by you of the Equivalent Rights in return for monetary payments from the JV Participants.

Issue 2 Question 1

Are the supplies you make to the JV Participants under each of the Subleases excluded from being taxable supplies by subsection 51-30(2)?

Summary

The supplies you make to the JV Participants under each of the Subleases are excluded from being taxable supplies by subsection 51-30(2).

Detailed reasoning

The supplies made by you to the JV Participants under the Subleases possess the following characteristics:

· The supplies are made for consideration;

· The supplies are made by you in the course of carrying on your enterprise;

· The things that are subject to the subleases are made available in Australia:

· You (the sub-lessor) are registered for GST;

· The supplies are not GST-free or input taxed.

Normally, such supplies would be taxable supplies under section 9-5. However, as already discussed above, if applicable, subsection 51-30(2) will apply and the supplies will be deemed not to be taxable.

In the present case, all the requirements of subsection 51-30(2) are met as follow:

· You (inherently the nominated JV Operator), as sub-lessor, are making the supplies under the Subleases; and

· the supplies are made to the JV Participants (as such, paragraph 51-30(2)(a) is met); and

· the JV Participants acquired the things that are subject to the Subleases for use in the course of activities for which the relevant Joint Operating Agreements were entered into (therefore paragraph 51-30(2)(b) is also met).

Accordingly, through the operation of subsection 51-30(2), the supplies you make to the JV Participants under the Subleases are treated as if they were not taxable supplies.

¹ Unless otherwise stated, all legislative references in this document are to the GST Act