Edited version of your private ruling

Authorisation Number: 1012459124993

Ruling

Subject: Development Lease and entitlement to Input Tax Credits

Question 1

Are you entitled to claim input tax credits (ITC's) on your development expenses under the terms of the Development Lease you have entered into?

Answer

Yes

Question 2

Will the ITC's claimed on development expenses, be subject to a Division 129 adjustment,?

Answer

No.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You, entity A have been registered for GST since 1 July 2000. You have entered into a number of Development Lease arrangements with entity B. These leases impose various obligations on you in respect of the land.

Pursuant to these Development Leases, you are obligated to develop, subdivide and construct services on the land and to ensure that all planning conditions for the subdivision of the land are met.

The development works that you undertake to allow for subdivision include:

· bulk earthworks,

· land filling,

· the creation of roads, footpaths and public open space, and

· the construction of public utilities infrastructure for water, sewerage, drainage, electricity and telecommunications connections.

You engage third parties to carry out the development works you are required to perform under the Development Leases. The third parties issue you with tax invoices in respect of the development services provided and charge you GST on these supplies.

After satisfying the obligations under the Lease, you are granted the option to purchase the fee simple estate in the land from entity B.

When you exercise the option to acquire the land you will provide both monetary and non-monetary consideration in respect of your acquisition of the land at the expiration of the lease.

The monetary consideration payable by the Housing Authority is set out in the Definitions section (Clause 1.1) of the Development Lease Agreement (please see the definition of 'Purchase Price'). It is set by reference to a valuation of the unimproved market value of the land, as determined by the Minister, on advice from the Valuer General, effective at the date of transfer of the freehold title.

The non-monetary consideration for your acquisition of the land is the GST inclusive market value of the development works provided by you to RDL pursuant to the lease..

Upon acquisition of the land pursuant to the Development Lease, you apply the land to your own purposes. Some of these purposes may include:

The development and sale of affordable vacant lots to members of the public.

The transfer of vacant lots to various community housing organisations.

The construction of social, public, disability or key worker housing.

The land acquired by you may be used to make subsequent taxable supplies, input taxed supplies or a mixture of both. To the extent the freehold title is acquired to make input taxed supplies you have confirmed that you will not be entitled to an input tax credit on the purchase of the property.

You have supplied the Lease document:

Reasons for Decision

Question 1

Are you entitled to claim input tax credits (ITC's) on your development expenses under the terms of the Development Lease you have entered into?

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act (GST Act) you are entitled to claim input tax credits for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered or required to be registered for GST.

The first requirement to be satisfied is that you have made an acquisition for a creditable purpose. According to subsection 11-15(1) of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, an acquisition is not made for a creditable purpose to the extent that it relates to making supplies that would be input taxed (paragraph 11-15(2)(a) of the GST Act).

Section 149-15 of the GST Act provides that:

For the purposes of the GST law, a government entity that is registered is treated, while its registration has effect, as if it were an entity carrying on an enterprise.

In your case, you are a government entity according to the definition of that term and are registered for GST. You are therefore considered to be carrying on an enterprise.

When you make an acquisition, the extent of your creditable purpose is based on your planned use of the acquisition in your enterprise expressed as a percentage of its total use.

In your case, you have entered into a Development Lease arrangement. The Lease imposes various obligations on you in respect of the land. Pursuant to the Development Lease, you are obligated to develop, subdivide and construct services on the land and to ensure that all planning conditions for the subdivision of the land are met.

Once the above obligations are satisfied, you are entitled to a transfer of the interest in fee simple of the land. The Lease Document provides that on registration of the Transfer, the interest of the Lessee in this lease in respect of the Land merges with the interest in fee simple of the Land, and this Lease shall be automatically surrendered by operation of law.

You have engaged third parties to carry out the development works which you are required to perform under the Development Lease. The third parties issue you with tax invoices in respect of the development services provided and charge GST on these invoices.

The Australian Taxation Office (ATO) issued a Decision Impact Statement on 20 April 2011 in response to the Federal Court decision, Federal Commissioner of Taxation v Gloxinia Investments Ltd (2010) 183 FCR 420. Amendments to the GST Act were subsequently effected through Tax Laws Amendment (2011 Measures No. 9) Act 2012.

The Explanatory Memorandum to Tax Laws Amendment (2011 Measures No. 9) Act 2012 provides a detailed explanation of the new law including an example. The Commissioner considers the effect of the decision in this case to be as follows:

Development lease arrangements

The term 'development lease arrangement' is a reference to an arrangement whereby a developer becomes entitled to the supply of a freehold or long term leasehold interest in land upon satisfactory completion of a development on that land.

A developer supplies development services to the land owner when they undertake development works pursuant to the terms of a development lease arrangement. The supply of those development services will be a taxable supply, and the land owner will make a corresponding creditable acquisition.

Upon transfer or grant of the freehold or leasehold title to the land comprising the completed works to the developer, the land owner makes a taxable supply to the developer. The consideration received from the developer will include the development works undertaken by the developer.

To the extent that the land comprises residential premises, the developer does not make a creditable acquisition in acquiring the land from the land owner. This is because the acquisition relates to the developer's subsequent sale or lease of residential premises (Section 40-35 and 40-65 of the GST Act).

We consider that your circumstances are similar to the arrangement outlined above. Consequently, you are entitled to claim full input tax credits on the development expenses incurred in fulfilling the terms of the development lease, as all the requirements for a creditable acquisition have been fulfilled.

Question 2

Will the ITC's claimed on development expenses, be subject to a Division 129 adjustment,?

The purpose of Division 129 is explained in Section 129-1.It states that:

The extent to which an acquisition or importation is for a creditable purpose affects the amount of the resulting input tax credit. When the extent of creditable purpose is changed by later events, adjustments (for the purpose of working out net amounts under Part 2-4) may need to be made.

Section 129-50 of the GST Act outlines what is meant by a 'creditable purpose' and states:

You *apply a thing for a creditable purpose to the extent that you apply it in *carrying on your *enterprise.

(2) However, you do not *apply a thing for a creditable purpose to the extent that:

a) the application relates to making supplies that are *input taxed; or

the application is of a private or domestic nature.

In your case, your actual use of the development expenses incurred did not vary from the planned use. The expenses were incurred to comply with the requirements of the Development Lease. Your planned extent of creditable purpose is 100% of the total purpose (that is, the acquisitions were made solely for a creditable purpose).

The subsequent acquisition of the property and the planned use of that property will determine the apportionment of the input tax credit applicable to the purchase of the property.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15(1),

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15(2)(a) and

A New Tax System (Goods and Services Tax) Act 1999 Section 149-15