Edited version of your written advice

Authorisation Number: 1012992674249

Date of advice: 4 April 2016

Ruling

Subject: Disposal of real property at less than market value

Question 1

Do you (Entity A) make a GST-free supply on the re-sale of an apartment to Entity B, Entity C, etc. for an adjusted sale price that is less than 75% of the adjusted purchase price paid to a Developer for that apartment?

Answer

No.

Question 2

Do you (Entity A) make a creditable acquisition on the purchase of an apartment from a Developer that you re-sell to Entity B, Entity C, etc.?

Answer

No.

Relevant facts and circumstances

• Entity A is an endorsed charity for Goods and Services Tax (GST) purposes in accordance with Division 176 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act).

• Entity A is registered for GST and accounts for GST on a non-cash basis.

• Entity A is considering purchasing a number of apartments from an unrelated residential property Developer to on-sell to prospective unrelated purchasers (Entity B, Entity C, etc.), who must meet Entity A's Eligibility Criteria.

• To facilitate the sale of the apartment to Entity B, Entity C, etc., Entity A and Entity B or Entity C, etc. will execute and enter into the following at the same time:

• a property sale contract based on the current Real Estate Institute (REI) standard terms in the relevant State/Territory, where the sale price for the apartment as adjusted by settlement adjustments (the adjusted sale price) is less than 75% of the purchase price paid by Entity A to a Developer for the apartment as adjusted by settlement adjustments (the adjusted purchase price); and

• a separate agreement, which regulates the rights and obligations of the parties.

• There will be a special condition in all standard REI contracts used in relation to the re-sale of apartments by Entity A, requiring Entity B, Entity C, etc. to enter into the separate agreement.

• A financial institution will advance funds by way of loan to Entity B, Entity C, etc., which are sufficient for the Entity B, Entity C, etc. to complete the purchase of the apartment from Entity A, and the financial institution will take the first registered mortgage over the apartment.

• To guarantee that Entity B, Entity C, etc. will abide by the terms of the separate agreement, Entity B, Entity C, etc. will grant Entity A an option to buy back the property in certain circumstances as set out in the separate agreement, allowing Entity A to re-sell to another entity who meets Entity A's Eligibility Criteria.

• The option will be secured by a mortgage (the second registered mortgage) over the property and is detailed in the separate agreement.

• The adjusted sale price for each apartment that Entity A re-sells to Entity B, Entity C, etc. will be less than 75% of the adjusted purchase price that Entity A paid the Developer for the apartment.

• The 'discount' that Entity A allows to the contract sale price is a minimum of 25%, and in some markets may need to be more.

• If a higher 'discount' than 25% is given, then the Option Removal Fee (see below) would equally rise.

• Each apartment that Entity A purchases from a Developer for re-sale to Entity B, Entity C, etc. is a taxable supply of new residential premises for GST purposes by the Developer to Entity A, and there will be no agreement between the Developer and Entity A for the margin scheme to apply.

• At the time of re-sale of an apartment to Entity B, Entity C, etc., the apartment is still 'new' for practical purposes but is no longer 'new residential premises' for GST purposes.

• Under the separate agreement, Entity A and Entity B or Entity C, etc. agree on a number of things, such as the following:

• In consideration for Entity A entering into the separate agreement, Entity B, Entity C, etc. grants Entity A an Option (for an Option Fee of $1) to buy the property pursuant to an Option Contract, which shall be on substantially the same terms as the Land Sale Contract, but for the Option Price (which is Fair Market Value).

• Entity B, Entity C, etc. has a number of obligations under the separate agreement, such as an obligation to continue to meet Entity A's Eligibility Criteria.

• At any time during the term of the agreement, Entity B, Entity C, etc. may pay Entity A the Option Removal Fee, in which case:

• the Option expires; and

• Entity A must release the second mortgage.

• Subject to Entity B, Entity C, etc. paying the Option Removal fee and the Option expiring, Entity A may exercise the Option at any time after a Trigger Event.

• If at any time during the term of the agreement Entity B, Entity C, etc. wishes to sell the property, Entity B, Entity C, etc. must give Entity A written notice.

• Subject to the rights of the holder of the first mortgage, if Entity A wishes to purchase the property, Entity A must give notice to Entity B, Entity C, etc. within a set period of time, setting out, amongst other things:

• that the Fair Market Value has to be determined in accordance with the terms of the separate agreement; and

• the amount of the Option Removal Fee.

• If Entity A does not wish to purchase the property or Entity A does not give the required notice, Entity B, Entity C, etc. may sell the property to a third party.

• If Entity B, Entity C, etc. sells the property, Entity B, Entity C, etc. must pay Entity A the Option Removal Fee.

• If Entity A buys the property from Entity B, Entity C, etc., Entity A may set off the Option Removal Fee from the purchase price of the property.

• If Entity B, Entity C, etc. cannot establish to Entity A's reasonable satisfaction that it meets Entity A's Eligibility Criteria and Entity B, Entity C, etc. does not pay Entity A the Option Removal Fee, then Entity A would have a number of options such as to:

• purchase the property at Fair Market Value and offset the Option Removal Fee from the purchase price; or

• have Entity B, Entity C, etc. sell the property to a third party and pay Entity A the Option Removal Fee from the sale proceeds; or

• charge Entity B, Entity C, etc. interest on the Option Removal Fee; or

• continue to allow Entity B, Entity C, etc. to reside in the property.

Relevant legislative provisions

All references below are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Subsection 9-15(1)

Subsection 9-15(2)

Subsection 9-75(1)

Subsection 11-15(1)

Subsection 11-15(2)

Section 11-20

Subsection 38-250(2)

Section 40-65

Section 40-75

Section 195-1

Reasons for decision

Question 1

Summary

Your supplies of apartments to Home Owners (Entity B, Entity C, etc.) will not be GST-free supplies, as the consideration that you will receive for each of the apartments will not be less than 75% of the consideration you provided or were liable to provide for acquiring each of the apartments from a Developer(s). The supplies will however be input taxed supplies of residential premises.

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that you make a taxable supply if: (1) you make the supply for consideration; (2) the supply is made in the course or furtherance of an enterprise that you carry on; (3) the supply is connected with the indirect tax zone; and (4) 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.

In your case, the supply of an apartment to a Home Owner that you would have originally purchased from a Developer is the supply of real property and meets all four requirements of a taxable supply as stated in section 9-5 of the GST Act as set out above. What remains to be determined is whether such supplies are either GST-free or input taxed.

Division 38 of the GST Act sets out the various categories of supplies that are GST-free. Specifically, section 38-250 of the GST Act deals with supplies by charities for nominal consideration.

Subsection 38-250(2) of the GST Act states as follows:

A supply is GST-free if:

(a) the supplier is an *endorsed charity, a *gift-deductible entity or a *government school; and

(b) the supply is for *consideration that :

…

(ii) if the supply is not a supply of accommodation - is less than 75% of the consideration the

supplier provided, or was liable to provide, for acquiring the thing supplied.

(*an asterisk denotes a term defined in section 195-1 of the GST Act)

Since it is already known that you are a charity, it is thus necessary to look at the meaning of 'consideration' and the amount of consideration payable to you for each of your supplies of real property, in order to determine if you meet the above test.

Under section 195-1 of the GST Act, 'consideration', for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17 of the GST Act, in connection with the supply or acquisition.

Section 9-15, which is relevant in this case, states as follows:

9-15 Consideration

(1) Consideration includes:

(a) any payment, or 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.

(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

…

Goods and Services Tax Ruling 2006/9 (GSTR 2006/9) deals with supplies and also discusses when there is a 'supply for consideration'.

Proposition 4 of GSTR 2006/9 provides that a transaction may involve two or more supplies.

Paragraphs 67 and 68 of GSTR 2006/9 provide that in a straight forward commercial transaction, a supply is made to a recipient, who provides consideration in the form of money to the supplier; but as the payment of money in these circumstances is not a supply, the recipient's payment of money is not a supply. However, if the recipient provides consideration in a non-monetary form, the consideration itself is a separate supply, such that there are two supplies, one going each way.

Proposition 14 of GSTR 2006/9 provides that a third party may pay for a supply but not be the recipient of the supply. Paragraph 179 of the same ruling provides that it makes no difference to the GST liability of the supplier which entity provides the consideration.

Paragraph 180 of GSTR 2006/9, which refers to other GST rulings including Goods and Services Tax Ruling 2001/6 (GSTR 2001/6) dealing with non-monetary consideration, states as follows in relation to the necessary nexus between consideration and a supply:

180. In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration user section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:

• the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

• regard needs to be had to the true character of the transaction; and

• an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transaction are made.

Paragraph 180A of GSTR 2006/9 explains further that, 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.

However, paragraph 54 of GSTR 2001/6 comments on the breadth of the connection between supply and consideration, and states:

54. In Australia, the definition of consideration is similarly wide. To the extent that 'in connection with' may be narrower in scope than 'in respect of', the phrases 'in response to' and 'for the inducement of' may assume added stature.

The nexus test is discussed further in paragraphs 70 to 72 of GSTR 2001/6, which state as follows:

70. The meaning given to the term 'in connection with' in Berry v. FC of T (1953) 89 CLR 653 ('Berry's case') is similar to that which was described by the Court of Appeal in New Zealand Refining, but needs to be applied with regard to the structure of the definition of supply in the GST Act. In Berry's case, Kitto J held that 'in connection with' was a broader test than 'for'. At page 659, his Honour commented that consideration will be in connection with property where:

'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

71. In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

72. The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive.

At paragraph 12 of GSTR 2001/6, it is explained in relation to consideration that a 'payment' is not limited to a payment of money; but that it includes a payment in a non-monetary or in an 'in kind' form, such as: providing goods; granting a right or performing a service (an act); and entering into an obligation, for example to refrain from selling a particular product (a forbearance).

Further, paragraph 13 of GSTR 2001/6 provides that where there is monetary consideration for a supply, it does not necessarily follow that there is no other consideration for that supply, and that if you receive any non-monetary consideration for a supply, the price includes the GST inclusive market value of that consideration.

Regarding different forms of consideration, paragraph 80 of GSTR 2001/6 provides that consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, the paragraph goes on to explain that things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction.

Paragraphs 83 to 87 of GSTR 2001/6 explain that:

• many transactions involve exchanging various rights and obligations between the parties to the transaction, but the true character of the transaction may characterise the payment as a condition of the contract rather than the provision of non-monetary consideration.

• subject to the terms of the agreement, transactions will often involve a supply made only for monetary consideration. In these circumstances, obligations entered into as part of the transaction by the entity that is liable to provide the money will not be separate parts of the consideration for the supply.

• non-monetary consideration needs to have a clearly independent identity. Obligations that are essentially another way of describing the consideration do not have a separate existence.

• particular terms that form part of a transaction need to go beyond merely defining or describing the supply, or specifying rights that are to be retained by the entity making the supply, before the terms form a separate supply or additional consideration for a supply under the transaction.

• in the case referred to in the example, the paying of rates by the tenant to the local rating authority was held to form part of the consideration for the supply of the leased premises by the landlord to the tenant and not consideration for a supply from the local rating authority to the tenant or for a separate supply from the landlord.

Further, paragraph 15 of GSTR 2001/6 states as follows regarding various obligations entered into by parties to a transaction and whether they are consideration for a supply:

15. Many transactions involve parties entering into multiple obligations. The question arises as to whether those obligations are consideration (or additional consideration) for a taxable supply.

GSTR 2001/6 also discusses the distinction between monetary and non-monetary consideration. Paragraph 2 of that ruling provides that any consideration expressed as an amount of money is referred to as monetary consideration in the ruling.

Paragraph 32 of GSTR 2001/6 provides further that for the purposes of subsection 9-75(1) of the GST Act (which deals with the value of taxable supplies), the Commissioner is of the view that 'consideration expressed as an amount of money' is consideration that finds expression in money; and that the distinction between paragraphs 9-75(1)(a) and 9-75(1)(b) of the GST Act is essentially between monetary consideration and what can be broadly described as 'in kind' consideration.

It is also explained later in GSTR 2001/6 at paragraph 43 that consideration in the form of money, to be paid at a future time, is 'consideration expressed as an amount of money' under subsection 9-75(1) of the GST Act. The consideration is not the right to receive that money.

Further, paragraph 44 of GSTR 2001/6 states as follows in regards to an unascertainable final amount:

44. The Commissioner has issued a determination under paragraph 29-25(2)(e) to be applied in certain circumstances where the total consideration is unknown in the tax period when GST would normally be payable. This determination alters the attribution rules by allowing an entity to account for the GST payable in different tax periods depending upon when the amount of consideration is known. The words 'an amount of money' do not require that a final amount of money is known as at any particular time, such as when the agreement is made …

Additionally, in the example at paragraphs 45 and 46 of GSTR 2001/6, it is illustrated that the GST on the $100,000 (which is agreed to be paid on completion of the transfer of a business that is sold by an entity that accounts for GST on a non-cash basis) is attributable in the tax period in which the $100,000 is received, and that the GST on the remaining amounts of consideration (10% of the gross sales of the business in excess of $150,000 each year over the next two years) is attributable when those amounts are known.

How this applies in your case

Applying the above to the facts of your case, we do not consider the sale price as stated in the contract of sale between you and a Home Owner to be the only consideration for the supply by you of an apartment to a Home Owner.

The contract of sale includes a special condition that the Home Owner and you enter into the separate agreement at the same time as entering into the sale contract.

Under the separate agreement, as well as the Home Owner granting you an option (in return for payment of an option fee of $1) to buy back the property and the Home Owner agreeing for you to take out a second mortgage over the property, the separate agreement places a number of restrictions on how the Home Owner or the Home Owner's successors can deal with the property unless and until the Home Owner or the Home Owner's successors pay you the Option Removal Fee.

Whilst you contend that you will only receive the Option Removal Fee if the Home Owner wants the option removed and can pay for it to be removed, it is evident from the terms of the separate agreement that the Option Removal Fee will eventually become payable (be that when you exercise the option as a result of a Trigger Event, or be that when the Home Owner sells the apartment or dies without any of the Home Owner's successors meeting your Eligibility Criteria - which you can amend at your absolute discretion).

The payment of the Option Removal Fee is intrinsically related to the sale by you of the apartment to the Home Owner. On signing the sale contract, a Home Owner also has to enter into the separate agreement, resulting in the Home Owner (or the Home Owner's successors) being obliged at some future point in time to pay you the Option Removal Fee.

The Option Removal Fee is thus part of the consideration for your supply of the apartment to the Home Owner. The payment of the Option Removal Fee is simply deferred to some future point in time.

By requiring the Home Owner to enter into the separate agreement at the same time as entering into the sale contract, you are in effect securing the future payment to you of the Option Removal Fee.

The amount of the Option Removal Fee is stated in the separate agreement as being the relevant percentage multiplied by the Fair Market Value of the property. This basically equates to the difference between the Fair Market Value of the property at the relevant time less the 'discounted' contract price for the sale of the apartment by you to the Home Owner.

As the Option Removal Fee is expressed as an amount of money, it is monetary consideration for the supply by you of the apartment to the Home Owner, and is in addition to the consideration paid by the Home Owner for the apartment at settlement.

The fact that the Option Removal Fee varies in each case such that it rises equally with the percentage of 'discount' that you will provide on the sale price of the apartment, further demonstrates the close connection between the Option Removal Fee and the sale of the apartment by you to the Home Owner.

The true character of the transaction in your case is that there is a supply of an apartment to a Home Owner, whereby the Home Owner has to pay most of the Fair Market Value of the apartment to you up front, and either the Home Owner or the Home Owner's successors have to pay the remainder of the Fair Market Value of the apartment (which basically equates to the 'discount' on the sale price) to you at some point in the future.

We do not consider the Option Removal Fee to be consideration for some separate supply by you. It forms part of the consideration for the supply by you of the apartment to the Home Owner as it is as condition of the sale contract that the Home Owner also has to enter into the separate agreement which then secures an additional amount payable to you for the apartment in the future.

As such, the consideration for the supply of an apartment by you to a Home Owner includes both the amount paid at settlement and the amount (when known) of the future payment of the Option Removal Fee that the Home Owner or the Home Owner's successors will be obliged to pay to you at some point in the future. If this were not the case, it would not make sense, from a practical business point of view, for you to purchase an option to buy back the apartment at Fair Market Value after you had sold the apartment to the Home Owner for considerably less than the Fair Market Value.

The obligation to pay the Option Removal Fee at some point in time in the future has some similarities with deferred management fees (or exit fees) in freehold situations as discussed in Issue 11 of the Retirement Villages Industry Partnership - Issues Register, which states that deferred management fees are part of the consideration for the purchase of real property unless the provisions of the relevant contract specify that they are consideration for a supply other than real property.

It is also to be noted that it is not relevant that the Option Removal Fee may end up being paid by someone other than the Home Owner that you supplied (sold) the apartment to (refer to subsection 9-15(2) of the GST Act).

As the total consideration for the supply by you of an apartment to a Home Owner will be approximately what you paid the Developer for the apartment rather than being less than 75% of what you paid the Developer, you will not meet the requirements of section 38-250 of the GST Act, and therefore your supplies of apartments to Home Owners will not be GST-free.

However, as the supplies of apartments by you to Home Owners will be the second supply of residential premises, such that the premises will no longer be new residential premises as defined in the GST Act, the supplies will be input taxed and no GST will be payable on the supplies (refer to sections 40-65 and 40-75 of the GST Act).

Question 2

Summary

You do not make a creditable acquisition when you purchase an apartment from a Developer that you on-sell to a Home Owner, as the acquisition relates to making supplies that would be input taxed.

Detailed reasoning

Under section 11-20 of the GST Act, you are entitled to the input tax credit for any creditable acquisition that you make.

Whilst subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise, subsection 11-15(2) of the GST Act provides that you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

As the acquisitions (purchases) of the apartments by you from the Developer (as well as any other costs relating to the purchase and sale of the apartments) relate to you making supplies that would be input taxed (as you would be re-selling those apartments to Home Owners after they had previously been sold to you as residential premises), the acquisitions are not creditable acquisitions to you and you will not be entitled to claim input tax credits for those acquisitions.