Edited version of your written advice

Authorisation Number: 1012900800640

Date of advice: 19 November 2015

Ruling

Subject: Goods and Services Tax: Property

Question 1

Will payments by Entity B to the land owner under 3 different scenarios be consideration for the supply of land by Entity A under the Deed of Lease?

Scenario (a) Compulsory Acquisition by Entity A

Land is acquired by Entity A as a result of compulsory process and Entity B fulfils the statutory obligation of Entity A to make compensation payments for the compulsory acquisition of the land by paying the compensation amount directly to the affected land owner.

Scenario (b)

Entity B acquires the land from a land owner and pays them directly. The land is then on-sold to Entity A for a nominal amount usually $1.

Scenario (c)

Land is acquired by Entity A under a voluntary sale agreement with the land owner with Entity B paying the amount due by Entity A directly to the affected land owner.

Answer

Scenario (a)

The lease of the land, compulsorily acquired by Entity A, to Entity B is a taxable supply for the consideration paid by Entity B to the land owner.

Scenario (b)

The supply of the land from the land owner to Entity B is a separate supply to the supply of the land to Entity B by Entity A under the lease. The payment by Entity B to the land owner is consideration for the supply by the land owner to Entity B.

The supply of the freehold interest in the land by Entity B to Entity A is non-monetary consideration for the taxable supply of the leasehold interest by Entity A to Entity B. The supply of the leasehold interest by Entity A to Entity B is, in turn, non-monetary consideration for the taxable supply of the freehold interest by Entity B to Entity A.

Scenario (c)

The supply of the land by Entity A to Entity B under the lease is a taxable supply and the payment by Entity B to the land owner is consideration for that supply.

Question 2

Will the Commissioner allow Entity A to issue one tax invoice for the additional supplies identified under Scenario (a), Scenario (b) and Scenario (c)?

Answer

Yes.

Question 3

Will Entity B be entitled to claim an input tax credit for GST raised under this invoice?

Answer

Yes.

Question 4

Will Entity and Entity B be liable for penalty and interest charges on liabilities raised in relation to these transactions?

Answer

Entity A will not be subject to penalties and interest in relation to liabilities raised in relation to these transactions. Entity B may be liable to penalties and interest.

Relevant facts and circumstances

Entity A is a statutory authority

Entity B is a company.

Both entities are registered for GST

Entity A and Entity B entered into a Deed of Lease. Subsequent amendments arose from Variation Deeds (the Lease).

Clause X of the Lease provides that Entity B can request that Entity A acquire additional land and may then lease this land to Entity B by way of variation of the Lease

Land can be acquired in the following manner:

(a) as a result of compulsory process; or

(b) by Entity B directly from a land owner and then 'on-sold' to Entity A for a nominal amount usually $1; or

(c) by Entity A under a voluntary sale agreement with the land owner.

Once the land is acquired by Entity A it may then be leased to Entity B under an additional land lease in the form contemplated by the Lease.

In each of these cases, Entity B normally pays the land owner directly in accordance with its obligation under clause Y of the Lease to pay all costs reasonably incurred by Entity A in relation to the land acquisition.

The Lease

The following summarised clauses are relevant for the purpose of this ruling:

Clause 1.1 Definitions…

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9,

A New Tax System (Goods and Services Tax) Act 1999 Division 11 and

A New Tax System (Goods and Services Tax) Act 1999 Division 29

Reasons for decision

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Land has been acquired under 3 different scenarios.

Scenario (a) Compulsory Acquisition

Land is acquired by Entity A as a result of compulsory process and Entity B fulfils the statutory obligation of Entity A to make compensation payments for the compulsory acquisition of the land by paying the compensation amount directly to the affected land owner.

Scenario (b)

Entity B acquires land from a land owner and pays them directly. The land is then 'on-sold' to Entity A for a nominal amount usually $1.

Scenario (c)

Land is acquired by Entity A under a voluntary sale agreement with the land owner with Entity B paying the amount due by Entity A directly to the affected land owner.

The scenarios are addressed individually below.

Scenario (a)

Supplies

GST is payable on any taxable supply that is made.

Under section 9-5 of the GST Act you make a taxable supply if:

(a) you make the 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; and

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

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

(*Denotes a term defined in the GST Act)

Goods and Services Tax Ruling GSTR 2006/9 GST: supplies (GSTR 2006/9), provides guidance in relation to the identification and characterisation of supplies.

Where a written agreement exists this is the logical starting point in determining supplies that have been made. The arrangement will be characterised not merely by the description the parties give to the arrangement but by looking at the transactions entered into and the circumstances in which the transactions are made.

'Supply' has the meaning given by section 9-10 and is any form of supply whatsoever.

Land acquisitions by government authorities are discussed in paragraphs 80 to 84 of GSTR 2006/9. Paragraph 82 states that in cases where land vests in the authority as a result of the authority seeking to acquire the land, and initiating the compulsory acquisition process pursuant to its statutory right, then the owner does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

Accordingly, there is no supply by the land owner to Entity A when land is acquired by way of compulsory acquisition.

However, under the terms of the Lease, land acquired in this way is then leased to Entity B. This is a supply pursuant to section 9-10. For this to be a taxable supply under section 9-5 the supply must be for consideration. We will examine whether the payment made by Entity B to the land owner is consideration for the supply under the lease.

Consideration

GSTR 2001/6 GST: non-monetary consideration (GSTR 2001/6) is relevant.

Consideration is defined in section 9-15 to include any payment, or act or forbearance, in connection with, in response to, or for the inducement of a supply of anything.

There are 2 elements to the definition of consideration. The first is a payment by one entity to another. The second is the nexus that must be established between the payment and the supply. Whether there is sufficient nexus is an objective test.

Regard needs to be had to the true character of the transaction, looking at the transactions entered into and the circumstances in which the transactions are made. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration.

For real property transactions, 'consideration' may be regarded as anything that 'moves' the conveyance or transfer.

The provisions of the relevant Act allows Entity A to compulsorily acquire land. The owner of the land acquired is entitled to be paid compensation by Entity A. Under the provisions of that Act, on the date of publication in the Gazette of an acquisition notice the land is vested in Entity A and freed and discharged from all interests in, over or in connection with the land.

Under the terms of the Lease, Entity B has an obligation to meet the costs of any additional land they request. As the payments are made by Entity B to the land owner to facilitate the supply of the land by Entity A to Entity B, we consider there is a sufficient nexus between payments made to the land owner and the supply under the Lease.

The lease of the land, compulsorily acquired by Entity A, to Entity B is a taxable supply for the consideration paid by Entity B to the land owner.

Scenario (b)

Entity B acquires land from a land owner and pays them directly. The land is then 'on-sold' to Entity A for a nominal amount usually $1.

The supply of the freehold interest by Entity B in the land to Entity A and the lease of the land by Entity A to Entity B are both supplies pursuant to section 9-10.

We will consider whether these are supplies for consideration in accordance with paragraph 9-5(a).

As in scenario (a), consideration includes any payment, or act or forbearance, in connection with, in response to, or for the inducement of a supply of anything.

Further, a 'payment' is not limited to a payment of money. It includes a payment in a non-monetary form. For a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply.

By providing non-monetary consideration for a supply, you are in turn making a supply.

In your case the supply of the freehold interest in the land by Entity B to Entity A is non-monetary consideration for the supply of the leasehold interest by Entity A and the supply of the leasehold interest by Entity A is, in turn, non-monetary consideration for the supply of the freehold interest by Entity B. As supplies are being made for consideration they are taxable supplies.

Valuation of non-monetary consideration

Where the consideration for supplies is non-monetary, the GST inclusive market value of the consideration is used to work out the price and value of that supply. As Entity A and Entity B are dealing with each other at arm's length, the Commissioner considers that the things exchanged between the parties are of equal GST inclusive market value.

The market value can be determined by using a reasonable valuation method as agreed by the parties. However, this method must produce a reasonable GST inclusive market value of the things exchanged.

As the land has been supplied by Entity B for non-monetary consideration together with an amount of money, the GST inclusive market value needs to be apportioned to determine the price of the supply by Entity A.

In this instance, as the freehold interest is supplied by Entity B in exchange for money ($1) and non-monetary consideration (being the supply of the leasehold interest from Entity A) the price of the supply of the leasehold interest is determined by reducing the agreed GST inclusive market value of the land supplied by Entity B by $1.

The supply of the land from the land owner to Entity B is a separate supply to the supply of the land to Entity B by Entity A under the lease. The payment by Entity B to the land owner is consideration for the supply by the land owner to Entity B.

Scenario (c)

Land is acquired by Entity A under a voluntary sale agreement with the land owner with Entity B paying the amount due by Entity A directly to the affected land owner.

Land acquired by Entity A by voluntary agreement with the land owner and then leased to Entity B to enable them to fulfil their obligations under the lease is a supply pursuant to section 9-10.

Entity B has an obligation to pay the costs of any additional land acquired by Entity A and provided to Entity B under the Lease. Accordingly, the payment to the landowner by Entity B is a payment pursuant to the lease agreement. It has sufficient nexus with the supply of the land by A under the lease to Entity B and is therefore consideration for the supply pursuant to the Lease.

Therefore the supply of land by Entity A to Entity B under the lease, of land acquired by Entity A from a land owner through voluntarily agreement, is a taxable supply and the payment by Entity B to the land owner is consideration for that supply.

Question 2

Will the Commissioner allow Entity A to issue one tax invoice for the additional supplies identified under Scenario (a), Scenario (b) and Scenario (c)?

Pursuant to section 29-70(2) a supplier is required to give the recipient a tax invoice for a supply within 28 days after the recipient of the supply requests the supplier to do so.

Details of more than one supply may be entered on a tax invoice.

As a tax invoice has not yet been issued in the relation to the additional supplies identified under the three scenarios, Entity A may issue one tax invoice in respect of these supplies.

Question 3

Will Entity B be entitled to claim an input tax credit for GST raised under this invoice?

Entity B is entitled to an input tax credit under section 11-20 of the GST Act when it makes a creditable acquisition. A creditable acquisition is made 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.

A thing is acquired for a creditable purpose to the extent that it is acquired it in carrying on your enterprise and it does not relate to making input taxed supplies and is not of a private or domestic nature.

It has been accepted that Entity B has provided consideration for taxable supplies made by Entity A under each of the scenarios in Question 1. As the other requirements under section 11-20 are satisfied, Entity B has made creditable acquisitions.

Input tax credits are attributed for a creditable acquisition to the earlier of the tax periods in which

• you provide any of the consideration; or

• an invoice is issued for the acquisition.

However, an input tax credit is not attributable to a tax period if you do not have a tax invoice for the acquisition when you lodge your BAS for that tax period. You attribute the input tax credit to the first tax period for which you hold a tax invoice when you lodge your BAS.

Therefore input tax credits will be attributable to the tax period in which Entity B holds a valid tax invoice.

Question 4

Will Entity A and Entity B be liable for penalty and interest charges on liabilities raised in relation to these transactions?

Entity A

Miscellaneous Taxation Ruling MT2011/1 Miscellaneous taxes: application of penalties and interest charges to the Commonwealth, States, Northern Territory and Australian Capital Territory (MT 2011/1) sets out the Commissioners view on the application of the uniform penalty regime and interest charges to liabilities of the Commonwealth and States.

States and State government bodies can have both legal and notional liabilities. The general interest charge (GIC) and shortfall interest charge (SIC) apply to a State body in relation to its legal liabilities. They do not apply in relation to notional liabilities.

The imposition of taxes is subject to section 114 of the Constitution which prohibits the Commonwealth and the States from imposing a tax on property belonging to a State or the Commonwealth respectively. The concept of property takes its ordinary meaning. A tax on transactions can nevertheless be a tax on property if the tax in substance is a tax on ownership or holding of property.

A liability that arises under a State law is a notional liability to Commonwealth tax and not a legal taxation liability. The taxation liability is notional because, although prohibited by section 114 of the Constitution, it is paid pursuant to State Legislation consistent with the Intergovernmental Agreement on Federal Financial Relations.

Entity A is a statutory authority of the Government of a State and it is accepted that the supplies of land under the Lease result in notional liabilities. Therefore no GIC or SIC will apply to revisions to business activity statements in this instance.

Entity B

You contend that while Entity B does not fall with the definition of 'Commonwealth body' in MT 2011/1, it is analogous to the types of entities covered by MT 2011/1 as it is 100% owned by the Commonwealth government, and thus, should benefit from the principles set out in MT 2011/1.

Entity B was incorporated as an Australian public company limited by shares.

The uniform penalty regime and interest charges will not apply to a Commonwealth body in relation to GST. A Commonwealth body refers to the Crown in right of the Commonwealth or any emanation of instrumentality including a statutory corporation. This term also refers to an untaxable Commonwealth entity, an authority of the Commonwealth or a Commonwealth authority.

The Commissioner's view on the meaning of Commonwealth is expressed in GSTR 2006/5. The Commonwealth may include a corporation, however not every corporation in which the Commonwealth has an interest is part of the Commonwealth.

The fundamental principle outlined in paragraph 11 of GSTR 2006/5 applies equally in determining whether a corporation is the Commonwealth. If the corporation is discharging governmental functions for the Commonwealth the corporation is the Commonwealth. On the other hand, if the intention is for the corporation to fulfil functions independently of and not as an instrument of the Commonwealth, such that the concept of a Commonwealth activity cannot be realistically applied to what the corporation does, the corporation is not the Commonwealth.

Paragraph 12 GSTR 2006/5 outlines principles to be considered in characterising the Commonwealth. In applying these principles, with particular reference to 12(n), it is considered that Entity B is not the Commonwealth.

In addition, Entity B is not an untaxable Commonwealth entity as it does not fall within the definition of that term in section 177-1(5) as it is not a Commonwealth authority within the meaning of the Commonwealth Authorities and Companies Act 1997 nor an Agency within the meaning of the Financial Management and Accountability Act 1997.

Consequently, Entity B may be subject to interest and penalties.