Edited version of your private ruling

Authorisation Number: 1012433957801

Ruling

Subject: GST and transfer fee payable to a body corporate on the assignment of management rights

Question 1

Is the transfer fee received by you for consenting to the assignment of management rights subject to GST under section 9-40 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice/Answers

Yes, the transfer fee received by you is subject to GST under section 9-40 of the GST Act.

Question 2

Is the transfer fee received by you for the assignment of management rights assessable as income according to ordinary concepts under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes, the transfer fee received by you for the early termination of the Agreement is assessable as income according to ordinary concepts under section 6-5 of the ITAA 1997.

Relevant facts and circumstances

You are the body corporate for a block of units.

You are registered for GST.

You have an Agreement with entity A for the provision of body corporate manager services.

Entity A assigned its management rights under the Agreement earlier than the prescribed two-year period from the initial contract date.

Entity A was required to pay you a transfer fee which is payable under Section 124 of the Body Corporate and Community Management (Accommodation Module) Regulation 2008 (Body Corporate Regulation).

Paragraph 124(2)(b) of the Body Corporate Regulation sets this transfer fee at 2% of an amount representing the fair market value for the transfer.

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 9-40

Income Tax Assessment Act 1997 Section 6-5

Body Corporate and Community Management (Accommodation Module) Regulation 2008 Section 124

Reasons for decision

Question 1

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supply that you make.

The definition of a taxable supply is provided in section 9-5 of the GST Act which states:

You make a taxable supply if:

(a) the supply is made for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

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

However, the supply is not a taxable supply to the extent that it is *GST-free or*input taxed.

(* denotes a defined term in section 195-1 of the GST Act)

The meaning of "supply" is defined in section 9-10 of the GST Act:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a)  a supply of goods;

(b)  a supply of services;

(c)  a provision of advice or information;

(d)  a grant, assignment or surrender of *real property;

(e)  a creation, grant, transfer, assignment or surrender of any right;

(f)   a *financial supply;

(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;

(h)  any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Section 9-70 of the GST Act states:

The amount of GST on a *taxable supply is 10% of the *value of the taxable supply.

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies GSTR 2006/9) explain the Commissioner's view in relation to supplies. In particular paragraphs 33, 34 and 35 of GSTR 2006/9 state:

33. The words 'A supply is any form of supply whatsoever' in subsection 9-10(1) cover all supplies regardless of whether they concern goods or services. This obvious breadth of the concept of supply is confirmed by the EM, which states (in reference to subsection 9-10(1)):

This is defined broadly and is intended to encompass supplies as widely as possible.

34. The intended scope of subsection 9-10(1) is more fully illustrated in subsection 9-10(2), of which the EM states:

[It] provides a list of things that are included as supplies. It is not an exhaustive list. It does not limit the possible breadth of the definition of supply in subsection 9-10(1).

35. Subsection 9-10(2) does not limit subsection 9-10(1). Something that is not listed in subsection 9-10(2) but falls within subsection 9-10(1) will be a supply.

In your case, by allowing Entity A to assign its management rights to another entity, you are making a supply of authorising Entity A to transfer its rights to another entity. This supply is a separate and distinct supply from the supply that Entity A will make to whoever it transfers its management rights to.

For a supply to be taxable, the requirements as listed in Section 9-5 of the GST Act must be fulfilled. The supply you make Entity A, being the consent to assign its management rights to another entity, is made for consideration, is made in the course of your enterprise as a body corporate, is connected with Australia as the supply is performed in Australia and you are registered for GST.

Furthermore, your supply is not GST-free under Division 38 of the GST Act or input taxed under Division 40 of the GST Act.

Accordingly you make a taxable supply and are required to remit 1/11 of the transfer fee to the Tax Office.

Question 2

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

· · are earned

· · are expected

· · are relied upon; and

· · have an element of periodicity, recurrence or regularity.

A compensation amount generally bears the character of that which it is designed to replace (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952)10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516; Tinkler v. FC of T (1979) 40 FCR 116; 79 ATC 4641; (1979) 10 ATR 411 and Case Y47 91 ATC 433; AAT Case 7328 (1991) 22 ATR 3422).

According to the Regulatory impact statement for the proposed regulations under the Body Corporate and Community Management Act 1997:

The transfer fee is designed to compensate the body corporate for the disruption caused by a quick turnover in letting agents and service contractors. This is considered reasonable given a caretaker is essentially breaking their contract by seeking a transfer and the body corporate cannot unreasonably refuse to agree to the transfer.

An amount received in connection with the cancellation or variation of a contract or agreement made in the course of carrying on a business is usually of an income nature if the amount which it replaces would have been income.

On the other hand, if the cancellation or variation affects the framework of the business or causes a substantial part of the business to be lost, then the amount received will be of a capital nature.

In Californian Oil Products Ltd (in liq) v. Federal Commissioner of Taxation (1934) 52 CLR 28; (1934) 3 ATD 10 ( Californian Oil ) the taxpayer under a number of agreements agreed to be an agent of an oil company for the sale of the oil company's petroleum products. By mutual consent the latest agency agreement was cancelled and the taxpayer was to receive a payment. The amount was not calculated by reference to lost earnings though it was to be paid by way of a series of equal instalments. It was held by the High Court that the payment was a capital amount.

In Allied Mills Industries Pty Ltd v. Federal Commissioner of Taxation (1989) 20 FCR 288; (1989) 20ATR 457; 89 ATC 4365 ( Allied Mills ) the taxpayer gave up the right to exploit its sole distributorship of certain biscuit products. In return it received a payment of an amount. The taxpayer distributed several products and the biscuits were a substantial part of its business. However the biscuits were only a part of its business and the contract in question was only one of several made in the ordinary course of its business. The Federal Court felt that the distribution arrangements themselves yielded the profit. They did not simply provide the means of making profit. The payment was essentially designed to compensate the taxpayer for the loss of anticipated profits flowing from the termination of the contract. The Federal Court regarded the payment as being on the same footing as the profits themselves would have been, if they had been received. The amount was held to be income. The court said:

   '...The activities and structures of the appellant as a whole must be considered in determining whether the rights of the appellant which were terminated by the 1977 agreement constituted a structural asset. Normally in order for a contract to be regarded as a capital asset it must be a contract which is of substantial importance to the structure of the business itself. This is a factual matter and inevitably a matter of degree. Here the appellant was not parting with a substantial part of its business or ceasing to carry on business as was the case in Californian Oil Products. Furthermore the appellant was not disposing of part of the fixed framework of its business in the sense required by Van den Bergs v. Clarke, ([1935] AC 431 at 442). The contracts here in themselves yielded profit; they did not simply provide the means of making profit...'

The payment of the transfer fee was essentially made as compensation for any loss of income/profits due to the disruption to your business.

The amount has the characteristics of ordinary income, regardless that it is a one off lump sum payment. It has no enduring benefit. The transfer fee is a cost imposed by the regulatory authority on the industry for early transfers, so the imposition of the transfer fee may be regarded as normal incidents in that kind of business.

Therefore, the transfer fee paid to you by Entity A for the early transfer is ordinary (non-mutual) income in your hands and is included in your assessable income under section 6-5 of the ITAA 1997.