Edited version of your written advice

Authorisation Number: 1012777054549

Ruling

Subject: Funding Deed and Deed of Variation

Question 1

Is the acquisition of the Alternative Additional Dwellings by the State pursuant to the Deed of Variation of Funding Deed (Deed of Variation) for transfer to Rental Co a creditable acquisition?

Answer 1

No, the acquisition of the Alternative Additional Dwellings by the State pursuant to the Deed of Variation for transfer to Rental Co is not a creditable acquisition.

Question 2

Is the construction of the Affordable Housing Units by the State pursuant to the Deed for transfer to Rental Co a creditable acquisition?

Answer 2

Yes, the construction of the Affordable Housing Units by the State pursuant to the Deed for transfer to Rental Co is a creditable acquisition.

Question 3

Is an acquisition by the State which is used to construct a dwelling or other improvements on land owned by Rental Co a creditable acquisition?

Answer 3

Yes, an acquisition by the State which is used to construct a dwelling or other improvements on land owned by Rental Co is a creditable acquisition

Question 4

Is Rental Co required to pay GST in respect of the grant of operational funding by the State to Rental Co pursuant to the Deed?

Answer 4

No, Rental Co is not required to pay GST in respect of the grant of operational funding by the State to Rental Co pursuant to the Deed.

Question 5

Is Rental Co required to pay GST in respect of the D Funding provided by the State to Rental Co pursuant to the Deed of Variation?

Answer 5

No, Rental Co is not required to pay GST in respect of the D Funding provided by the State to Rental Co pursuant to the Deed of Variation.

Relevant facts and circumstances

Funding Deed:

The State entered into a Funding Deed (Deed) with Rental Co.

The Deed states that the State seeks to support appropriate not for profit organisations committed to providing affordable housing to eligible households in the State and that Rental Co is a non-profit company.

The Deed also states that the State wishes to achieve the Objectives in conjunction with Rental Co, that is:

• having Rental Co provide in the State quality Affordable Housing (defined as leased at a rent less than 75% of the market rent) to Affordable Housing Eligible Persons;

• effecting an increase in the overall number of Affordable Housing properties in the State; and

• establishing Rental Co as a financially viable housing provider.

The Deed has a Term of 30 years, subject to either earlier termination or the State extending the Term by a period of 15 years. Upon expiration of the Term of the Deed, subject to any Claim arising prior to such expiration, the State shall cease to have any interest in the State Properties, the State shall sign all documents necessary to release any interest in the State Properties, and Rental Co shall be at liberty to deal with Rental Co's property (including the State Properties) without reference to the State. 'State Properties' is defined to include:

• the Affordable Housing Units;

• the D Land (if Rental Co accepts a transfer of the D Land in accordance with the Deed);

• the Additional Units; and

• any other real property transferred to Rental Co as additional funding.

The Deed obliges the State to provide a grant of $XX (exclusive of GST) to Rental Co to be used for payment of Rental Co's operational expenses.

The Deed obliges the State to use reasonable endeavours to ensure that the Affordable Units are constructed and all permits and approvals required to use the Affordable Units as residences are issued and states that the State will cause the Affordable Housing Units to be transferred to Rental Co for no monetary consideration within a reasonable time after they are completed.

The Deed states that the State will transfer the D Land to Rental Co for no consideration 28 days after Rental Co notifies the State that Rental Co agrees to accept the transfer. If Rental Co accepts the transfer of the D Land, Rental Co will at its own cost develop the D Land for the purpose of providing Affordable Housing and the State will provide Rental Co with a $XX loan facility. This clause of the Deed is varied by the Deed of Variation discussed below.

The Deed also states that the State intends to provide funding by transferring 140 Additional Units (that is, newly constructed dwellings) to Rental Co in stages as those Additional Units are completed. This obligation is varied by the Deed of Variation (discussed below).

The Deed also deals with 'Future Properties', that is, real property acquired by Rental Co where the State has transferred or vested the freehold interest in the property to or in Rental Co, Rental Co has acquired the property using funds provided by the State, or where the State constructs housing or makes other improvements on land owned by Rental Co or makes improvements to property owned by Rental Co.

The Deed states that Rental Co must not mortgage, charge or otherwise encumber the State Properties without the State's prior written consent, Rental Co must not sell, transfer, assign or otherwise dispose of the State Properties without the State's prior written consent, and that Rental co must not, without the State's prior written consent, lease any of the State Properties other than to Affordable Housing Eligible Persons for Affordable Housing in accordance with the Deed. The Deed allows the State to lodge restrictive covenants and caveats over all or any of the State Properties.

Deed of Variation:

The State and Rental Co entered into a Deed of Variation of Funding Deed (Deed of Variation).

The Deed of Variation states that the D loan facility provided for in the Deed will not be made available by the State to Rental Co and that the State will instead provide $YY (inclusive of GST) of D Funding which Rental Co agrees to use solely for development of the D Land.

The Deed of Variation also states that the State will not provide additional funding to Rental Co in the form of the Additional Units. Instead the State will transfer to Rental Co the Alternative Additional Dwellings listed in the Deed of Variation in stages as the State settles the purchase of the Alternative Additional Units when the respective developments containing them are completed.

Submissions:

In relation to Question 1 (that is, is the acquisition of the Alternative Additional Units by the State for transfer to Rental Co pursuant to the Deed of Variation a creditable acquisition) it was submitted that, as the acquisition of the Alternative Additional Units by the State does not relate to making supplies that would be input taxed, the exclusion from creditable purpose in paragraph 11-15(2)(a) of the GST Act does not apply, the State acquires the Alternative Additional Units for a creditable purpose and therefore makes a creditable acquisition.

In relation to Question 2 (that is, whether the construction of new residential premises (that is, the Affordable Housing Units) for transfer to Rental Co is a creditable acquisition) it was submitted that the exclusion from 'creditable purpose' in paragraph 11-15(2)(a) of the GST Act, that is, the acquisition relates to making supplies that would be input taxed, does not apply because the State does not construct the Affordable Housing Units to make input taxed supplies but to transfer them to Rental Co pursuant to the Deed.

In relation to Question 3 (that is, whether acquisitions used by the State to construct a dwelling or other improvements on land owned by Rental Co are creditable acquisitions) it was submitted that the acquisitions that relate to the construction of a dwelling do not relate to an input taxed supply made by the State and are therefore creditable acquisitions.

In relation to Question 4 (that is, whether GST applies to the grant of operational funding made by the State to Rental Co) it was submitted that Rental Co is a non-profit body and the grant is therefore a payment which is excluded from consideration by subsection 9-17(2) of the GST Act. Consequently Rental Co does not make a supply for consideration, does not make a taxable supply, and is not required to pay GST in respect of the grant.

In relation to Question 5 (that is, whether GST applies to the D Funding provided by the State to Rental Co) it was also submitted that Rental Co is a non-profit body and the D Funding is therefore a payment which is excluded from consideration by subsection 9-17(2) of the GST Act. Consequently Rental Co does not make a supply for consideration, does not make a taxable supply, and is not required to pay GST in respect of the Driver Funding.

Further submissions:

The State submitted that Question 1 involved two supplies, that is, the supply of the Alternative Additional Dwellings by the developer to the State and the supply of the Alternative Additional Dwellings by the State to Rental Co. It was submitted that the supply of the Alternative Additional Dwellings by the developer to the State is a taxable supply of new residential premises and the State will be entitled to claim ITCs in respect of the acquisition of those Alternative Additional Dwellings from the developer. It was submitted that the conclusion in the draft ruling that the State was not making a creditable acquisition because the State will use the Alternative Additional Dwellings to make an input taxed supply of residential premises to Rental Co was incorrect as it merges two supplies into one.

The State advised that Question 3 was concerned about a situation where the State either constructs a new dwelling or makes other improvements on land owned by Rental Co.

Relevant legislative provisions

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

Reasons for decision

Question 1

Summary

The acquisition of an Alternative Additional Dwelling by the State for transfer to Rental Co is not a creditable acquisition. The State does not acquire the Alternative Additional Dwelling solely or partly for a creditable purpose because the acquisition relates to making supplies that would be input taxed, that is, a sale to Rental Co of real property that is residential premises.

Detailed reasoning

The Deed obliges the State to transfer to Rental Co 140 Additional Units, being newly constructed dwellings.

The Deed of Variation states that the State will not transfer the Additional Units to Rental Co but instead will acquire newly constructed dwellings (Alternative Additional Dwellings) for transfer to Rental Co in stages as each development is completed.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

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

Section 11-15 of the GST Act sets out the meaning of 'creditable purpose':

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

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

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

(3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside Australia.

(4) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed if:

(a) the only reason it would (apart from this subsection) be so treated is because it relates to making financial supplies; and

(b) you do not exceed the financial acquisitions threshold.

(5) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that:

(a) the acquisition relates to making a financial supply consisting of a borrowing (other than through a deposit account you make available); and

(b) the borrowing relates to you making supplies that are not input taxed.

Subsection 11-15(1) of the GST Act states that an entity acquires a thing for a creditable purpose to the extent that the entity acquires it in carrying on the entity's enterprise. Paragraph 55 of Goods and Services Tax Ruling GSTR 2008/1 refers to subsection 11-15(1) and states:

It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on.

'Enterprise' is defined in subsection 9-20(1) of the GST Act:

(1) An enterprise is an activity or series of activities, done:

…

(g) by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory;

In the present case the Deed and Deed of Variation are between a State and Rental Co. Paragraph 323 of Miscellaneous Taxation Ruling MT 2006/1 states:

323. Paragraph 9-20(1)(g) of the GST Act includes as an enterprise any activity or series of activities done by the Crown in the right of the Commonwealth, a State or a Territory.

Goods and Services Tax Ruling GSTR 2006/5 discusses the meaning of 'the Commonwealth, a State, or a Territory' for the purposes of a number of provisions in the GST Act, including section 9-20. Paragraph 6 of GSTR 2006/5 states:

6. The Commissioner considers that the Commonwealth, a State or a Territory includes a department, agency or organisation of the type referred to in the definition of 'government entity' in section 195-1.

Section 195-1 of the GST Act states that 'government entity' has the meaning given by section 41 of the A New Tax System (Australian Business Number) Act 1999, which includes:

(d) a Department of State of a State or Territory

Paragraph 7 of GSTR 2006/5 states that this means that 'the Commonwealth, a State or a Territory' includes, inter alia, a Department of State of a State or Territory. This means that the series of activities done by a State department is an enterprise for GST purposes. Paragraph 60 of GSTR 2008/1 states that in determining the enterprise that is being carried on the relevant indicators include the activities that generate income, formation documents, contracts, business records, and business plans. In the present the recitals to the Deed state:

State seeks to support appropriate 'not-for-profit' organisations committed to providing Affordable Housing…

…

State wishes in conjunction with the Rental Co to:

(1) achieve the Objectives.

The Objectives listed in the Deed include having Rental Co provide quality Affordable Housing to Affordable Housing Eligible Persons in the State. These provisions of the Deed indicate that the enterprise carried on by the State includes the provision of financial and other support by the State to not-for-profit entities which provide Affordable Housing.

There is a clear connection between the acquisition of the Alternative Additional Dwellings and the State's enterprise as the Deed states that the parties acknowledge that Rental Co will need additional funding to achieve the Objectives. The Deed of Variation states that the State will now provide that additional funding in the form of the Alternative Additional Dwellings and that the State has consulted with Rental Co to ensure that the Alternative Additional Dwellings are suitable for Rental Co's purposes. We are therefore satisfied that the State acquires the Alternative Additional Dwellings in carrying on the State's enterprise, as required by subsection 11-15(1) of the GST Act.

It is then necessary to consider subsection 11-15(2) of the GST Act, as explained in paragraph 101 of GSTR 2008/1:

If it is established that an acquisition is made in carrying on an enterprise, paragraph 11-15(2)(a) will preclude it being for a creditable purpose to the extent that it 'relates to' making supplies that would be input taxed. In this section of the Ruling, all of the examples assume that the acquisitions have been made in carrying on an enterprise.

The Deed of Variation states that the State

…will acquire newly constructed dwellings in developments being undertaken in [ ] and [ ] for transfer to the Rental Co in stages as each of the relevant developments are completed.

The Rental Co will accept a transfer of the Alternative Additional Units from the State in stages as the State settles the purchase of the Alternative Additional Units when the respective developments containing them are completed.

These provisions of the Deed of Variation indicate that the State will acquire the Alternative Additional Dwellings (which are described in the Deed of Variation as 'newly constructed dwellings') and then transfer those dwellings to Rental Co.

Subdivision 40-C of the GST Act, which deals with residential premises, includes section 40-65 which deals with sales of residential premises and states:

(1) A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential occupation (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or

(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

'Real property' is defined in section 195-1 of the GST Act to include any interest in or right over land.

Paragraph 18 of Goods and Services Tax Ruling GSTR 2003/3 states that 'sale', 'sale of real property' and 'sold' are not defined in the GST Act but, for the purposes of section 40-65, refer to the disposal of the land held in its entirety (that is, transfer of the full and complete ownership of land, that is, the maximum interest that the Crown has alienated, whether it is leasehold or freehold) for consideration. The Deed of Variation states that the State 'will acquire' the Alternative Additional Dwellings 'for transfer' to Rental Co, refers to the State's ability 'to transfer or cause to be transferred', and states that Rental Co will accept a transfer of the Alternative Additional Dwellings from the State in stages. This suggests that, in relation to the Alternative Additional Dwellings, the State will transfer the full and complete ownership of land to Rental Co as required by paragraph 18 of GSTR 2003/3.

Paragraph 18 of GSTR 2003/3 further requires that the transfer is 'for consideration'. Both the Deed and the Deed of Variation indicate that the Additional Units and the Alternative Additional Dwellings are being transferred to Rental Co as 'additional funding' provided by the State, that is, additional to the funding provided pursuant to other clauses of the Deed. Consequently Rental Co is not obliged to provide monetary consideration for the transfer of the Alternative Additional Dwellings. However, the Deed of Variation states (in part):

All of the provisions of the Funding Deed in relation to the Additional Units will be deemed to apply to the Alternative Additional Units (sic), except where the context does not allow.

The Deed states that the Additional Units are included in the definition of 'State Properties'. Consequently the transfers of the Alternative Additional Dwellings to Rental Co are subject to the restrictions set out in the Deed in relation to the State Properties, that is,

• Rental Co must not mortgage, charge or otherwise encumber the State Properties without the State's prior written consent;

• Rental Co must not sell, assign, transfer or otherwise dispose of the State Properties without the State's prior written consent;

• Rental Co must not lease the State Properties other than to Affordable Housing Eligible Persons without the State's prior written consent; and

• Rental Co consents to the State registering a restrictive covenant and/or caveat over all or any of the State Properties.

In addition, the Deed makes Rental Co responsible for the maintenance and management of the State Properties. These obligations are supported by the State's right to terminate the Deed if Rental Co ceases to carry out any of its obligations under the Deed, in which case the State may immediately take possession of the State Properties and direct the transfer of the State Properties free of mortgage to either the State or an Alternative Not For Profit Organisation.

The definition of 'consideration' in subsection 9-15(1) of the GST Act includes any act or forbearance in connection with a supply of anything and any act or forbearance in response to or for the inducement of a supply of anything. We consider that, by agreeing to the restrictions in the Deed in relation to the Alternative Additional Dwellings, Rental Co provides consideration in connection with the supply of the Alternative Additional Dwellings by the State to Rental Co. Consequently the transfer of the Alternative Additional Dwellings by the State to Rental Co will be a 'sale of real property' for the purposes of section 40-65 of the GST Act.

The GST treatment of the transfer of any Alternative Additional Dwelling by the State to Rental Co will turn upon whether the dwelling is 'residential premises to be used predominantly for residential accommodation' (which is input taxed pursuant to subsection 40-65(1) of the GST Act) or is 'new residential premises' (which is stated by subsection 40-65(2) not to be input taxed and will be a taxable supply if the requirements of section 9-5 are satisfied).

Section 195-1 defines 'residential premises':

'residential premises' means land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

Paragraph 9 of Good and Services Tax Ruling GSTR 2012/5 states that the requirement in section 40-65 that the residential premises are to be used predominantly for residential accommodation is a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Paragraph 15 of GSTR 2012/5 states:

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

The Deed of Variation describes the Alternative Additional Dwellings as 'newly constructed dwellings' and includes a warranty by the State that the Alternative Additional Dwellings will be 'suitable for residential use without the need for further work or modifications'. Based on these provisions we consider that each Alternative Additional Dwelling will be 'residential premises to be used predominantly for residential accommodation' within the meaning of subsection 40-65(1) and the supply of that Alternative Additional Dwelling will be input taxed unless the exception in subsection 40-65(2) for new residential premises' applies.

'New residential premises' is defined in subsections 40-75(1) and (2) of the GST Act:

(1) Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

Note 1:

For example, residential premises will be new residential premises if they are created as described in paragraph (b) or (c) to replace earlier premises that had ceased to be new residential premises because of paragraph (a).

Note 2:

However, premises that are new residential premises because of paragraph (b) or (c) will cease to be new residential premises once they are sold, or supplied by way of long-term lease, as residential premises (see paragraph (a)).

Note 3:

Premises created because of the registration of, for example, a strata title plan, or a plan to subdivide land, may not become new residential premises (see subsection (2AA)).

(2) However, the residential premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or

(b) if paragraph 1(b) applies - the premises were last substantially renovated; or

(c) if paragraph (1)(c) applies - the premises were last built;

the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

Paragraph 25 of GSTR 2003/3 states that if residential premises satisfy any one of the categories in subsection 40-75(1) then, subject to subsection 40-75(2), they are new residential premises.

As the Deed of Variation states that the State 'will acquire newly constructed dwellings…for transfer to the Rental Co in stages as each of the relevant developments are completed', we doubt that paragraph 40-75(1)(a) applies to the supply of the Alternative Additional Units by the State to Rental Co. In relation to paragraph 40-75(1)(a), paragraphs 27 and 30 of GSTR 2003/3 state:

27. Paragraph 40-75(1)(a) raises the question whether the residential premises have previously been sold as residential premises or have previously been the subject of a long-term lease. Where land (or part of that land) and a building that is residential premises is sold, it is the previous sale, or long-term lease, of that land (or that part of the land) and building as residential premises which will determine whether the premises are new.

30. For the purposes of paragraph 40-75(1)(a) we consider the residential premises referred to are the land and the residential building on that land (that is, you look at the land and building as a package)…

As the Deed of Variation states that the State intends to 'acquire newly constructed dwellings' (that is, land and the residential building on that land) 'for transfer to the Rental Co', we consider that those dwellings will have previously been sold as residential premises (that is, by the developer to the State) and that the transfer of those dwellings by the State to Rental Co therefore cannot be a sale residential premises which 'have not previously been sold as residential premises' as required by paragraph 40-75(1)(a).

Note 2 to subsection 40-75(1) suggests that the neither paragraph 40-75(1)(b) nor paragraph 40-75(1)(c) will apply to the transfer of an Alternative Additional Dwelling by NTG to Rental Co, that is, even if the Alternative Additional Dwelling is created through substantial renovations of a building or is built to replace demolished premises it ceases to be 'new residential; premises' as soon as the developer sells it to the State and the subsequent transfer of the Alternative Additional Dwelling by the State to Rental Co cannot be a supply of 'new residential premises'.

Subsections 40-75(2A), (2B), and (2C) allow certain supplies of residential premises to be disregarded for the purposes of applying paragraph 40-75(1)(a). We do not consider that those provisions will apply in the present case.

For the reasons set out above we consider that the transfer of the Alternative Additional Dwellings by the State to Rental Co will not be a taxable supply of new residential premises but will be an input taxed supply of residential premises. As a result, the acquisition of the Alternative Additional Dwellings will not be for a creditable purpose because the acquisition relates to making supplies that would be input taxed. Part B of GSTR 2008/1 deals with determining a connection between an acquisition and the making of supplies that would be input taxed and paragraph 120 lists seven situations which raise particular considerations in establishing such a connection, including:

(5) An acquisition is preparatory to the making of an input taxed supply

Paragraphs 149 to 171 set out a number of examples that fall within situation (5), including Example 11 (paragraphs 167-168):

Example 11 - commencing an enterprise that makes taxable and input taxed supplies

167. Bazza has purchased land from an entity registered for GST. The supply of the land to Bazza is a taxable supply and the margin scheme was not used to calculate the GST on the supply. Bazza intends to build a stratum unit complex on the land consisting of commercial shops on the ground floor and residential premises in the remainder of the complex. It is intended that the shops and residential premises will be leased.

168. Bazza's acquisition of the land is to make both input taxed supplies (leasing residential premises) and taxable supplies (leasing commercial shops). To the extent that the acquisition of the land relates to the leasing of the residential premises, it is not acquired for a creditable purpose and apportionment on a fair and reasonable basis is required.

In our view the acquisition of an Alternative Additional Dwelling by the State is similar to the acquisition of land by Bazza in Example 11, except that in the State's case that acquisition is made to make input taxed supplies (that is, transferring the Alternative Additional Dwelling to Rental Co) rather than to make both input taxed supplies and taxable supplies. Nevertheless the reasoning set out in paragraph 166 of GSTR 2008/1 applies:

166. … In this case, acquisitions made in commencing the enterprise are not made for a creditable purpose to the extent those acquisitions are for the purposes of preparing to make supplies that would be input taxed.

In the further submissions made by the State after we issued a draft of this ruling it was submitted that the supply of Alternative Additional Dwellings by a developer to the State would be a taxable supply. We agree. It was then submitted:

The draft ruling concludes that the acquisition from the developer would not be a creditable acquisition because they will be used by Rental Co to make input taxed supplies. This appears to be merging two supplies into one. However, Rental Co is to use the dwellings to provide affordable housing, defined as 'housing that must be leased to Affordable Housing Eligible Persons at a rent less than 75% of market rent'. Because Rental Co is endorsed as a Public Benevolent Institution, it is considered that subdivision 38-G applies to make the supplies by Rental Co GST-free supplies. If this is the case, the acquisition of new residential premises by the State relates to GST-free supplies and not input taxed supplies.

This further submission misunderstands the basis on which we consider the acquisition of an Alternative Additional Dwelling by the State from the developer not to be a creditable acquisition, that is, not because of what Rental Co does with that Alternative Additional Dwelling but because of what the State does with that Alternative Additional Dwelling, that is, uses it to make a supply to Rental Co of 'residential premises to be used predominantly for residential accommodation' which is input taxed pursuant to subsection 40-65(1) of the GST Act. The acquisition of that Alternative Additional Dwelling by the State, therefore, is not made for a creditable purpose as that acquisition relates to the State making supplies that are input taxed.

Question 2

Summary

The construction of the Affordable Housing Units by the State for transfer to Rental Co is a creditable acquisition. The State acquires an input used in construction of the Affordable Housing Units solely or partly for a creditable purpose because the acquisition relates to making taxable supplies, that is, a sale of real property that is new residential premises.

Detailed reasoning

The Deed states that the State will use reasonable endeavours to ensure that the Units are constructed in a workmanlike manner, that all necessary permits and approvals for use of the Units as residences are obtained and that the first scheme statement for the unit title scheme relating to the Units is registered with the Land Titles Office.

The Units include the Affordable Housing Units. The Deed states that the State will cause the Affordable Housing Units to be transferred to Rental Co for no monetary consideration.

The relevant submissions in the ruling request repeated the submissions made in respect of Question 1, that is, the acquisitions made by the State to construct the Affordable Housing Units are creditable acquisitions because the State does not construct the Affordable Housing Units in order to make input taxed supplies but in order to transfer the Affordable Housing Units to Rental Co pursuant to the Deed.

In the Reasons for Decision for Question 1 we concluded that the acquisition of the Alternative Additional Dwellings by the State satisfied subsection 11-5(1), that is, the State will acquire the Alternative Additional Dwellings in carrying on the State's enterprise. We also consider that to be the case in relation to acquisitions made by the State to construct the Affordable Housing Units, that is, the series of activities done by the State is an enterprise, the Deed indicates that the State's enterprise includes the provision of financial and other support to not-for-profit entities which provide Affordable Housing in the State, and there is a clear connection between acquisitions made by the State to construct the Affordable Housing Units and the State's enterprise.

In relation to subsection 11-15(2), which states that an entity does not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that are input taxed, in the Reasons for Decision for Question 1 we concluded that the transfer of the Alternative Additional Dwellings by the State to Rental Co for no consideration is a 'sale of real property' for the purposes of section 40-65, that is, a transfer of the full and complete ownership for consideration because the relevant clauses of the Deed of Variation refer to the State 'acquiring' the Alternative Additional Dwellings for 'transfer' to Rental Co and because Rental Co provided non-monetary consideration by entering into the obligations set out in the Deed in respect of State Properties (that is, Rental Co must not mortgage, sell, or lease the State Properties other than to Affordable Housing Eligible Persons without the State's prior written consent).

We also consider that the transfer of the Affordable Housing Units by the State to Rental Co will be a 'sale of property' for the purposes of section 40-65 as the State is obliged pursuant to the Deed to ensure the Units are constructed and all necessary permits for lawful use of the Units as residences are issued and the State is obliged pursuant to the Deed to cause the completed Affordable Housing Units to be transferred to Rental Co. Although Rental Co does not provide monetary consideration for the transfer of the Affordable Housing Units, Rental Co does provide non-monetary consideration because the Deed States that the Affordable Housing Units are State Properties and Rental Co enters into a number of obligations in respect of State Properties pursuant to the Deed.

In the Reasons for Decision for Question 1 we concluded that the transfer of the Alternative Additional Dwellings by the State to Rental Co was a sale of residential premises and not a sale of new residential premises and was therefore input taxed. In the case of the transfer of the Affordable Housing Units by the State to Rental Co, however, we consider that the State makes a supply of new residential premises which is not input taxed. We consider that the construction and transfer of the Affordable Housing Units by the State is similar to the erection of house on the second block of land followed by sale of that house and land as described in Example 1 in paragraphs 99 and 100 of GSTR 2003/3:

Example 1 - new residential premises - not previously sold

99. Jo, a property developer, is registered for GST. She purchases residential premises on a large block of land in February 2001 and subdivides the land into two blocks. The land at the time of purchase was on a single title. One block of land contains the existing residential premises and Jo erects a house on the vacant block of land. Both residential premises are sold in February 2002.

100. The first block of land, which has reduced in size (that is, the block containing the original house), is not new residential premises as that house and land together have previously been sold. The second block of land containing the newly built house is new residential premises as the block of land and new house have not previously been sold. The supply of the block with the newly built house is a taxable supply when sold in the course of Jo's enterprise. Jo is entitled to claim input tax credits on acquisitions relating to new residential premises, but not those relating to the previously existing premises.

In the Reasons for Decision for Question 1 we also referred to Part B of GSTR 2008/1 which discusses determination of a connection between an acquisition and the making of supplies that would be input taxed and we concluded that the acquisition of the Alternative Additional Dwellings by the State was not made solely or partly for a creditable purpose because that acquisition fell within situation (5) in paragraph 120 of GSTR 2008/1, that is, an acquisition preparatory to the making of an input taxed supply. We do not consider that to be the case in relation to acquisitions made in the course of constructing and obtaining the necessary permits and approvals for the Affordable Housing Units. Nor do we consider those acquisitions to be of a private or domestic nature. Consequently those acquisitions are made for a creditable purpose and will be creditable acquisitions where the requirements of paragraphs (b) to (d) of section 11-5 of the GST Act are satisfied.

Question 3

Summary

An acquisition made by the State which is used to construct a new dwelling or other improvement on a Future Property owned by Rental Co will be a creditable acquisition.

Detailed reasoning

The Deed sets out the circumstances in which Rental Co may acquire a Future Property (that is, where the State transfers to Rental Co or vests in Rental Co a freehold interest in property or where property is acquired by Rental Co using funding provided by the State) and the State then constructs housing on or makes other improvements to that Future Property.

In the reasons for decision in Question 1 we referred to the requirement in section 11-5 of the GST Act that an entity acquires a thing solely or partly for a creditable purpose in order for that acquisition to be a creditable acquisition.

As the acquisitions made by the State will be used by the State to construct a new dwelling (or other improvement) which will be permanently attached to land owned by Rental Co, that new dwelling will become a fixture, that is, considered part of the land owned by Rental Co rather than a separate piece or property owned by the State. The ATO's Goods and Services Tax Primary Production Industry Partnership Issues Register (which is stated to have the status of a public ruling) discusses the application of GST to fixtures attached to land and the State and Territory property law and agricultural tenancy legislation which applies to such fixtures, and then states (Para 7):

If there is no relevant statute then the general property law principles apply. This means that chattels owned by tenants that become fixtures become part of the land and become property of the landowner at affixation. A tenant who attaches goods to land so that they become fixtures will make a supply of goods to the land owner provided property in the goods passes to the land owner.

We therefore consider that the State will make a supply of the new dwelling to Rental Co when the new dwelling becomes attached to the Future Property owned by Rental Co because property in the new dwelling will pass to Rental Co. We note that the Deed contemplates property so passing to Rental Co because the Deed provides for an interest in a Future Property to be 'granted to the State' by separate agreement between the State and Rental Co negotiated at the time of acquisition or development of the Future Property. In order for such an interest to be 'granted to the State' Rental Co must own the Future Property plus new dwelling permanently attached to the Future Property by the State.

Consequently the issue of whether acquisitions made by the State and used by the State to construct a new dwelling on a Future Property are creditable acquisitions will turn upon the nature of the supply made by the State to Rental Co when the new dwelling becomes a fixture and property passes to Rental Co. If that supply is input taxed then subsection 11-15(2) would apply, that is, the State would not acquire the inputs used to construct the new dwelling for a creditable purpose because that acquisition would relate to making an input taxed supply.

In Question 2 we concluded that acquisitions made in the course of constructing the Affordable Housing Units are creditable acquisitions as the transfer of a Affordable Housing Unit by the State to Rental Co would be a 'sale of real property' within the meaning of subsection 40-65(1) which is new residential premises which satisfy paragraph 40-65(20(b).

The supply of a new dwelling by the State to Rental Co when that dwelling becomes attached to a Future Property is not a sale of real property. Section 195-1 of the GST Act states that 'real property' includes any interest in or right over land, a personal right to call for or be granted any interest in or right over land, or a licence to occupy land or any other contractual right exercisable over or in relation to land. The State will not supply to Rental Co any interest in or right over land. Consequently the State will not make an input taxed supply of residential premises (or a taxable supply of new residential premises) pursuant to section 40-65. Nor do we consider that the supply made by the State to Rental Co would be input taxed under any other provision of the GST Act or that the acquisitions made by the State are of a private or domestic nature. We therefore consider that the acquisitions made by the State and used by the State to construct a new dwelling on a Future Property will be made for a creditable purpose and where the requirements of paragraphs 11-5(b) to (d) of the GST Act are also satisfied those acquisitions will be creditable acquisitions.

Question 4

Summary

The grant of operational funding by the State to Rental Co pursuant to the Deed is a gift to a non-profit body within the meaning of subsection 9-17(2) of the GST Act and is not the provision of consideration. Consequently Rental Co is not required to pay GST in respect of the grant.

Detailed reasoning

The Deed obliges the State to provide a grant of operational funding to Rental Co to be used by Rental Co for payment of operational expenses.

The Deed states that Rental Co must clearly identify the receipt and expenditure of the operational funding within Rental Co's financial records, keep records which explain the expenditure of the operational funding, and ensure that all relevant records and accounts comply with the accounting principles applied to government and required by law.

Goods and Services Tax Ruling GSTR 2012/2 considers whether a payee (for example, Rental Co) makes a supply for which a 'financial assistance payment' is consideration (in which case the payee is required to account for GST if all the other requirements for making a taxable supply are satisfied).

Paragraph 5 of GSTR 2012/2 states that 'financial assistance payment' is intended to encompass a wide range of payments, including payments made to provide support or aid to the payee and/or support or aid in the implementation of government policy or initiatives, and include payments made to assist the payee to acquire goods or services.

Paragraphs 15 to 16 in the 'Ruling' section of GSTR 2012/2 state the following test:

15. For a financial assistance payment to be consideration for a supply there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. A financial assistance payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The test is an objective one.

15A. Further, in identifying the character of the connection, the word 'for' ensures that not every connection between supply and consideration meets the requirements for a taxable supply. That is, merely having any form of connection of any character between a supply and payment of consideration is insufficient to constitute a taxable supply.

16. Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether a financial assistance payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The surrounding circumstances may include the statutory purpose of the payer in providing the financial assistance, the activities which are to be undertaken by the payee and any other terms and conditions attached to the payment. However, none of these factors will be determinative on their own and the arrangement must the considered as a whole. The description the parties may give to the arrangement, whilst relevant, is not determinative.

A footnote to paragraph 15 of GSTR 2012/2 indicates that the issue of whether a financial assistance payment is 'consideration for a supply' refers to paragraph (a) in section 9-5 of the GST Act which states that an entity ('you') makes a taxable supply where:

(a) You make the supply for consideration

This raises a preliminary issue as to whether the operational funding is excluded from 'consideration' pursuant to subsection 9-17(2) of the GST Act:

(2) Making a gift to a non-profit body is not the provision of consideration.

That issue is discussed in paragraphs 104 to 114 of GSTR 2012/2. Paragraph 105 of GSTR 2012/2 states that 'non-profit body' is not defined in the GST Act but has two elements - the entity must be a body and the body must have the characteristic of being a non-profit body. Paragraph 106 refers to the definition of 'body' in The Macquarie Dictionary, that is, a collective group; or artificial person: body politic, body corporate. In the present case the Deed states that Rental Co is a non-profit company. We therefore consider that Rental Co is a 'body'.

Paragraph 108 of GSTR 2012/2 states that a body is a 'non-profit body' if, by operation of law (for example, a statute governing a body's activities) or by its constituent documents the body is prevented from distributing its profits or assets amongst its members while the body is functional and on the winding-up of the body. In the absence of such a restriction, whether or not a body is carried on for profit is determined by reference to the surrounding circumstances (for example, objects, policy statements, history, activities, and proposed future direction of the body). We have not seen Rental Co's Constitution, but the reference in the Deed to Rental Co as a 'non-profit company' suggests that Rental Co's objects and activities are such that Rental Co is not carried on for profit.

Subsection 9-17(2) of the GST Act excludes from 'consideration' a gift to a non-profit body. Paragraph 111 of GSTR 2012/2 states that a 'gift' involves a transfer of a beneficial interest in property which is made voluntarily and arises by way of benefaction where the giver receives no material benefit or advantage in return. Paragraph 112 states that application of those criteria may involve a matter of degree.

In the present case the Deed states that the State seeks to support appropriate 'not-for-profit' organisations committed to providing Affordable Housing, that the State wishes to achieve the Objectives in conjunction with Rental Co, and that the State has agreed to provide financial and other support to Rental Co to assist Rental Co in achieving the Objectives.

Paragraphs 113 and 114 of GSTR 2012/2 state:

113. A payment that is made as a function of government, and does not have the characteristics of benefaction including detached, disinterested generosity, is not a gift.

114. A payment that has conditions that relate to the payer's right to determine how the gift is to be used can still be a gift. Such conditions reflect the terms on which the donor makes, and the donee accepts, the payment. The payment may still be a gift if the rights that arise as part of the making of the payment do not directly or indirectly provide a material benefit to the payer or an associate.

A footnote to Para 113 refers to paragraph 36 of Taxation Ruling TR 2005/13. Paragraphs 27 to 36 of TR2005/13 discuss an essential attribute of a gift, that is, that benefaction is intended and conferred on the Deductible Gift Recipient (DGR). Paragraphs 34 to 36 of TR 2005/13 state:

34. A gift ordinarily proceeds from a detached and disinterested generosity. There may be a variety of reasons and motivations behind the giver making a gift. However, the fact that the giver has a personal motive for making the gift, such as a strong interest or emotional involvement in the work of the DGR, will not disqualify the gift from being tax deductible.

35. A motive of seeking a tax deduction does not, by itself, disqualify a transfer from being a gift.

36. In cases where it is clear on the objective facts that the giver is giving effect to self-interested commercial or fiscal objectives rather than conferring benefaction on the DGR, it will be evident that the transfer does not proceed from detached and disinterested generosity.

In the present case it is arguable that the payment is made as a function of government as a department of the State is a party to the Deed. However paragraph 113 of GSTR 2012/2 suggests that such a payment may be a gift if it has the characteristics of benefaction including detached, disinterested generosity.

The Deed states that the State wishes in conjunction with Rental Co to achieve the Objectives which include having Rental Co provide quality Affordable Housing to Affordable Housing Eligible Persons. These provisions of the Deed indicate that the State has a strong interest in the work of Rental Co which, according to paragraph 34 of TR 2005/13, does not prevent the grant from having the required characteristics of benefaction. Nor do the objective facts suggest, per paragraph 36 of TR 2005/13, that the State is giving effect to self-interested commercial objectives rather than conferring benefaction on Rental Co. Although it is arguable that the State is acting out of self-interest (as the support provided to Rental Co and other not-for-profit providers of Affordable Housing may ease the burden on the State), that does not appear to be the case as the Objectives listed in the Deed include effecting an increase in the overall number of properties that are available for use as Affordable Housing.

For the reasons set out above we consider that the grant of operational funding made by the State to Rental Co pursuant to the Deed is a gift to a non-profit body within the meaning of subsection 9-17(2) of the GST Act and is not the provision of consideration. Consequently Rental Co is not required to pay GST in respect of the grant.

Question 5

Summary

The D Funding provided by the State to Rental Co pursuant to the Deed of Variation is a gift to a non-profit body within the meaning of subsection 9-17(2) of the GST Act and is not the provision of consideration. Consequently Rental Co is not required to pay GST in respect of the D Funding.

Detailed reasoning

The Deed states that if Rental Co accepts the transfer of the D Land from the state then the State will provide Rental Co with a $XX loan.

The Deed of Variation states that the D Loan will no longer be made available by the State to Rental Co and that the State will instead provide $YY (inclusive of GST) D Funding to Rental Co for the purpose of undertaking the development of the D Land in the manner intended by the Deed and for the purpose of providing Affordable Housing. The Deed of Variation obliges Rental Co to proceed with the development of the D Land in a diligent manner and to clearly identify the receipt and expenditure of the D Funding. The Deed of Variation states that the D Funding is not a loan repayable to the State.

For the reasons set out above in Question 4 we consider that the D Funding is a gift to a non-profit body within the meaning of subsection 9-17(2) of the GST Act and not the provision of consideration. Consequently Rental Co will not be required to pay GST in relation to the D Funding.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.