Edited version of private advice

Authorisation Number: 1012620726590

Ruling

Subject: GST and supplies

Question

Does Entity X make a taxable supply when it nominates an entity (third party purchaser) to acquire the commercial property (Property) under the contract of sale?

Answer

No. Entity X does not make a taxable supply when it nominates the third party purchaser to acquire the Property under the contract of sale.

Relevant facts and circumstances

Entity X is registered for the goods and services tax (GST).

Entity X signed a contract to purchase the Property for consideration and paid a 10 per cent deposit up front.

The contract of sale for the Property sets out that the purchaser must pay the outstanding balance to the Vendor at the settlement date.

The contract of sale for the Property was in respect of a taxable supply and included GST.

The contract of sale for the Property includes a nominee clause which allows the purchaser to nominate a substitute or additional purchaser to purchase the property.

The real estate agent for Entity X found a third party (the third party purchaser) who was interested in purchasing the Property.

Entity X and the third party purchaser entered into an arrangement prior to settlement whereby Entity X nominated the third party purchaser to purchase the Property under the contract of sale.

As part of this arrangement the third party purchaser paid the outstanding amounts owed under the terms of the contract of sale for the Property. The third party purchaser also made a payment to Entity X being equal to the initial deposit amount paid by Entity X to the Vendor.

Upon settlement of the contract of sale the Property was transferred by the Vendor to the nominated entity being the third party purchaser.

The third party purchaser has also paid an amount towards the real estate agent fees for the real estate agents services. This payment was made by the third party purchaser to the real estate agent upon the real estate agent issuing the tax invoice to the third party purchaser.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 9-10

A New Tax System (Goods and Services Tax) Act 1999 9-15

Reasons for decision

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

You make a taxable supply if:

(a) you make a 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 of *input taxed.

An * denotes a term defined under section 195-1 of the GST Act.

The first requirement for a taxable supply is that there must be a 'supply for consideration'.

Section 9-15 of the GST Act provides the meaning of the term consideration and states:

(1) 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.

Further, Goods and Services Tax Ruling GSTR 2001/6, Goods and services tax: non-monetary consideration (GSTR 2001/6) states at paragraph 47:

47. 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 the payment. Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is a sufficient nexus between the supply and the payment as consideration.

In this case there is clearly a payment that flow from the third party purchaser to Entity X. Therefore what remains to be determined is whether this payment has the relevant nexus to an identified supply by Entity X.

The meaning of 'supply' is provided in section 9-10 of the GST Act and subsection 9-10(1) of the GST Act states that, 'A supply is any form of supply whatsoever'.

Subsection 9-10(2) of the GST Act contains a list of things that are included as supplies which includes (amongst other things):

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

• an entry into, or release from, an obligation to do anything or to refrain from an act or to tolerate an act or situation.

Goods and Services Tax Ruling GSTR 2006/9, Goods and services tax: supplies (GSTR 2006/9), provides guidance on the meaning of 'supply' in the GST Act. Paragraph 71 of GSTR 2006/9 explains that the term 'supply' has been held to take its ordinary meaning which is to 'furnish or to serve' or to 'furnish or provide'. In adopting the ordinary meaning, it follows that the supplier must take some action or do something to make a supply.

Further GSTR 2006/9 states at paragraph 137 the following:

137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply.

Further In determining the nature of the transaction paragraph 222 of GSTR 2006/9 states:

Proposition 16: the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply

222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

Consistent with paragraph 16 of GSTR 2006/9 it is necessary to consider the surrounding circumstances in respect of the sale of the Property and the deposit paid by Entity X to the Vendor. Relevantly in Goods and Services Tax Ruling GSTR 2000/28, Goods and services tax: attributing GST payable or an input tax arising from a sale of land under a standard land contract (GSTR 2000/28) the Commissioner states that:

26. If you hold a tax invoice, you attribute an input tax credit for a creditable acquisition of land under a completed standard land contract to the tax period in which settlement occurs.9AA This applies if you account for GST on a cash basis or if you do not account for GST on a cash basis.

In respect of deposits paid by a purchaser paragraph 63 of GSTR 2000/28 explains that standard land contracts provide for the payment of a deposit. This is usually 10 per cent of the purchase price (although other amounts may be agreed). Further paragraphs 67 to 70 state:

67. As Division 99 applies, the deposit held under a standard land contract is not treated as consideration for a supply unless the deposit is either forfeited because of a failure to perform the obligation or applied as part of the consideration for the supply of land.

68. This means at the time that the deposit is paid upon entering into a standard land contract, the deposit is neither consideration received by the vendor for any supply nor consideration provided by the purchaser for any acquisition. The payment of the deposit does not, therefore, trigger attribution of GST payable or input tax credits at the time it is paid.

69. A deposit under a standard land contract is applied as part of the consideration for the supply of land on settlement. As previously pointed out, on settlement the deposit becomes part payment and is applied for the vendor's benefit. Upon settlement, consideration is received for the supply of land and provided for the acquisition of land, triggering attribution of GST payable and input tax credits.

70. Under subsection 99-10(1), the GST payable on the deposit is attributable to the tax period in which settlement occurs.

In this case Entity X has nominated the third party purchaser to acquire the Property. In doing so, Entity X has recovered the deposit they provided to the Vendor from the third party purchaser.

For GST purposes, when an amount is recovered by an entity it can only be characterised as either as a 'reimbursement' of the expense or an 'on-charge' of the expenses. Relevantly Goods and Services Tax Advice GSTA TPP 042 states the following in respect of reimbursements in relation to lawyers' expenses.

…In the absence of an agency relationship directing liability to the client, the client's reimbursement to a lawyer of an expense forms part of the consideration for the lawyer's taxable supply of services. Conversely, where there is an agency relationship directing liability to the client, the expense does not form part of the consideration for the lawyer's taxable supply of services.

Whilst we accept that Entity X may have taken the necessary steps to nominate the third party purchaser under the contract of sale for the Property, we do not consider that the payment received by Entity X to recover the deposit amount represent consideration for any supply by Entity X. This is on the basis that this payment received by Entity X does not have a sufficient nexus to any supply they make.

Rather consistent with the explanation in GSTA TPP 042, it is our view that the amount of the payment by the third party purchaser, which is equivalent to the deposit paid by Entity X to the Vendor, is merely a 'recovery' of an expense that Entity X incurred 'on-behalf-of' the nominee rather than consideration 'for' a supply made to the third party purchaser.

As part of the arrangements the third party purchaser has also agreed to contribute an amount toward the real estate agent costs. Accordingly this payment is made in connection with the real estate agents services and does not have a sufficient nexus to any supply made by Entity X.

Consequently, as there is no payment received by Entity X from the third party purchaser which has a sufficient nexus with a supply made by Entity X the requirement of paragraph 9-5(a) of the GST Act is not met. Accordingly Entity X does not make a taxable supply.