Edited version of your written advice

Authorisation Number: 1012867059770

Date of advice: 26 August 2015

Ruling

Subject: Goods and services tax (GST) and contributions by members of association to fund purchase of land

Question 1

Will GST be payable on the (amount X) contributions you receive from members to fund your purchase of Lot Y?

Answer

Yes.

Question 2

Will you be required to be registered for GST as a result of the (amount X) contributions?

Answer

Yes.

Relevant facts and circumstances

You are not registered for GST.

You are a not for profit body registered under the relevant associations Act. You represent the interests of the (Z number) of rudimentary dwelling owners of (the certain community). The rudimentary dwellings, of varying construction standards, were erected over an extensive period as rudimentary buildings of a certain type in a certain locality in Australia. The rudimentary dwellings all sit on a (number) hectare parcel of land (Lot Y) excised from the original larger (certain use) title some years ago.

The land is generally unsuitable for any significant commercial or residential development under existing planning regulations. In view of these limitations an independent valuer estimated the market value on a particular date as (a certain amount).

Lot Y is privately owned by a local person (the landowner). There are (a certain number of) rudimentary dwellings constructed on Lot Y occupied either on a permanent or holiday use basis with each rudimentary dwelling owner leasing their respective parcel of land. Access to the area is via a locked gate accessible only by authorised residents. The lease allows occupation of the land in consideration for payment of rent and outgoings. It is a condition of the lease that the tenants become members of the association (you). The leases have a term of (certain number of) months and, following expiration of that term, the tenant may remain in occupation on a month by month basis. The leases are not registered on the title of the subject land. The rudimentary dwelling owners have never held clear title to their dwellings which have been allowed to remain at the discretion of the landowner.

In a certain year the local council sought to clarify the legal status of the community identifying the leasing arrangement as an "unlawful subdivision".

In a subsequent action in the court, the judge ordered that the use was lawful and also held that because there was no subdivisional approval, the lease agreements were not enforceable, but that the Council could not take any actions against the residents.

You currently collect the rent and contributions to outgoings (such as local council rates and land tax) from tenants on behalf of the landowner. You also collect contributions for the general upkeep of the area including a small community facility used by the tenants.

The landowner feels a strong bond with the local residents and has expressed some concern for the future of the community. Of particular concern is the possibility that in the event of their death the entire land holding including Lot Y might be sold with little to no regard for the rudimentary dwelling owners.

Acting on this concern for the rudimentary dwelling owners' longer term security of tenure, the land owner has agreed to sell Lot Y to you. The price requested is (a certain amount) (plus GST) per rudimentary dwelling; you will be required to cover all legal expenses.

You do not have the funds to acquire Lot Y. To enable you to make the purchase, the rudimentary dwelling owners/members have agreed that each rudimentary dwelling owner will need to contribute (a certain amount of money). These (certain number of) individual contributions would collectively constitute a once-only arrangement to facilitate the purchase.

Should the sale proceed there will be no change to the previously existing occupancy conditions in that it will remain an unlawful subdivision lacking planning permission for the settlement. You will not be able to grant legal title or be able to grant enforceable lease agreements.

The constitution of the association contains terms that make it a non-profit body.

It is anticipated that if the purchase goes ahead, you would conduct a similar relationship with the occupants to that currently existing with the landowner such that in exchange for a prescribed payment each dwelling owner will be granted a (certain number of) months lease to occupy their respective dwelling. You would continue to collect a regular membership fee in return for maintaining the access road, rubbish removal, meeting council rates and pursuing your objectives, as per the by-laws, fostering community harmony.

Based on current charges, your associated income would be around (a certain amount, which is less than $150,000) per annum.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-10

Section 9-15

Section 9-20

Section 23-5

Paragraph 23-15(2)(b)

Section 25-55

Section 25-57

Section 40-35

Subsection 138-5(1)

Division 188

Reasons for decisions

Questions 1 and 2

Summary

You will make a supply of an obligation to each member in return for their (amount X) contribution and the contribution is consideration for that supply. This is because you will enter into an obligation with the members to purchase Lot Y with these grants of financial assistance and these grants of financial assistance will be made to secure that obligation. Therefore, there is a sufficient nexus between these payments and your supplies of an obligation.

As you are carrying on an enterprise and your GST turnover will be over $150,000 when you receive the (amount X) contributions, you will be required to be registered for GST at that time.

GST will be payable on your supplies of the obligation in return for the (amount X) contributions because all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Detailed Reasoning

GST is payable on taxable supplies.

Under section 9-5 of the GST Act 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 the indirect tax zone (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.

(Note: Definitions of asterisked terms are provided in the Dictionary under section 195-1 of the GST Act)

In accordance with subparagraph 9-10(2)(g)(i) of the GST Act, a supply includes an entry into an obligation to do anything.

The term 'consideration' is defined in section 9-15 of the GST Act as any payment, or any act or forbearance, in connection with, in response to or for the inducement of, a supply of anything.

Goods and Services Tax Ruling GSTR 2012/2 discusses whether grants of financial assistance are consideration for a supply.

Paragraph 15 of GSTR 2012/2 states:

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.

Paragraph 28 of GSTR 2012/2 states:

28. Where a supply is constituted by the payee entering into an obligation with the payer to do or refrain from doing something and the payment is made to secure that obligation, there is a sufficient nexus between the payment and the obligation. This is because the financial assistance payment is made in connection with, in response to, or for the inducement of the entry into the obligation

Your members will provide grants of financial assistance to you specifically to fund the purchase of Lot Y.

You will enter into an obligation to purchase Lot Y with these grants of financial assistance. These grants of financial assistance will be made to secure that obligation. Therefore, in accordance with paragraph 28 of GSTR 2012/2, there is a sufficient nexus between the (amount X) payment and the obligation. This is because the financial assistance payment is made in connection with and for the inducement of your entry into that obligation. Hence, you will supply on an obligation to each member in return for their (amount X) contribution, which is consideration for that supply. Therefore, you meet the requirement of paragraph 9-5(a) of the GST Act.

In accordance with the Australian Taxation Office (ATO) GST and property fact sheet, a body corporate is a group of individual owners responsible for maintaining and administering property held in common - for example, a block of strata titled home units. If you are a body corporate, for GST purposes, you are carrying on an enterprise. You are carrying on similar activities, and have a similar role, to such a body corporate. Therefore, we consider that you are carrying on an enterprise.

You meet the requirements of paragraphs 9-5(b) and 9-5(c) of the GST Act. This is because:

• you will supply obligations (in return for the (amount X) contributions) in the course or furtherance of your enterprise, and

• these supplies will be connected with Australia.

GST registration

You are not registered for GST.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) it is carrying on an enterprise, and

(b) the entity's GST turnover meets the registration turnover threshold, which is $150,000 for non-profit entities.

You are carrying on an enterprise. Therefore, you meet the requirement of paragraph 23-5(a) of the GST Act.

You are a non-profit entity.

Division 188 of the GST Act sets out the rules on determining an entity's GST turnover. The consideration for supplies made in connection with the entity's enterprise is included in the calculation of GST turnover. However, there are some exclusions.

You will earn over $150,000 in contributions from members to fund the purchase of Lot Y. These contributions will be consideration for supplies you make in connection with your enterprise. Additionally, none of the exclusions in Division 188 of the GST Act apply.

Hence, your GST turnover will be over $150,000 when you receive the (amount X) contributions from members to fund the purchase of the property. Therefore, you meet the requirement of paragraph 23-5(b) of the GST Act.

As you will meet both requirements of section 23-5 of the GST Act, you will be required to be registered for GST when you receive the (amount X) contributions. Therefore, you meet the requirement of paragraph 9-5(d) of the GST Act.

There are no provisions of the GST Act under which your supplies of obligations in return for the (amount X) contributions will be GST-free or input taxed.

As you meet all of the requirements of section 9-5 of the GST Act, you will make taxable supplies in return for the (amount X) contributions. Therefore, GST is payable on these contributions.

Additional information

The rent you will be charging members will not be subject to GST because renting out residential premises is an input taxed supply and you will be renting out residential premises to members.

In accordance with section 11-5 of the GST Act, to be entitled to an input tax credit on the purchase of something, the purchaser must make the acquisition for a creditable purpose.

In accordance with paragraph 11-15(2)(a) of the GST Act, a purchaser does not acquire something for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed

You will generally be entitled to input tax credits on expenses you incur while registered or required to be registered for GST, provided that those expenses have a GST component.

However, you will only be entitled to an input tax credit on your purchase of your specific Lot if the sale of the property to you is subject to GST and the vendor does not use the margin scheme to calculate the GST and you are registered or required to be registered for GST at that time (settlement date). It will be the vendor's responsibility to determine whether the sale of the property is subject to GST. You will not be entitled to an input tax credit on your purchase of the property to the extent that it relates to making input taxed supplies (renting out the residential premises). See Goods and Services Tax GSTR 2006/4 for guidance on determining this extent (type in GSTR 2006/4 into an internet search engine).

GST turnover for compulsory GST registration purposes is calculated on an ongoing basis. If your GST turnover falls below $150,000, you will no longer be required to be registered for GST. Based on the information you provided, your GST turnover will fall below $150,000 after you have received the (amount X) contributions. The rent you will be receiving from members is excluded from GST turnover because input taxed supplies are excluded from GST turnover and renting out the dwellings is input taxed supplies. For guidance on determining GST turnover, see Goods and Services Tax Ruling GSTR 2001/7 (type in GSTR 2001/7 into an internet search engine).

Generally, once registered for GST, an entity must stay registered for GST for 12 months. However, a GST-registered entity that is no longer required to be registered for GST can apply for early de-registration, and the ATO will consider the request.

If you cancel your GST registration and you still own the land at that time, you may have an increasing adjustment under subsection 138-5(1) of the GST Act, which would effectively involve repaying all or part of the input tax credit (if any) you claim on the purchase of the property. Whether you have such an increasing adjustment will depend on the length of time you are registered for GST.