Edited version of your written advice

Authorisation Number: 1012994089668

Date of advice: 7 April 2016

Ruling

Subject: GST and Supply of Development Services

Question 1

Is the supply of Development Services by A to B under a Development Agreement within the Receivers and Managers of A's scope of responsibility or authority for managing A's affairs?

Answer

No

Question 2

Are the A Receivers or A (the incapacitated entity) liable for GST on the supply of the Development Services under the Development Agreement?

Answer

No. The Development Services were supplied by A under the Development Agreement prior to the appointment of the A Receivers, therefore A (the incapacitated entity) is liable to pay any GST for the supply of those services.

Relevant facts and circumstances

A is a property development company that undertook development works to construct a residential and commercial property development.

The A Receivers were appointed to A approximately one year after A finalised the building works. .A accounts on a non-cash basis, whereas the A Receivers account on a cash basis.

B is the registered proprietor of the land upon which the Development was constructed.

Approximately one year after A finalised the building works receivers and managers were appointed to B (B Receivers). B accounts on a non-cash basis, whereas the B Receivers account on a cash basis.

Development Agreement

B entered into a development agreement (the Development Agreement) with A to provide works on the land upon which the Development was to be constructed. In the Development Agreement, B is described as the Owner and A as the Developer.

The Development Agreement is in respect of the Project, which is defined as:

a) the planning and design of the Works;

b) the construction of the Works; and

c) the marketing and sale of the Lots.

The Development Agreement provides for A to undertake the Works and provides A with various powers in relation to the marketing and sale of the Lots. It sets out the allocation of the Project Proceeds, including the amount payable by B to A in consideration of the performance of A of its obligations under the Development Agreement.

By an amendment to the Development Agreement, A and B, agreed that pending the sale of the Lots B would pay A rent received from the lease of the Lots as part of the fee for A's services under the Development Agreement.:

Although the Development Agreement provides for A to provide a range of services, the primary services to be provided are:

a) the planning and design of the Works;

b) the construction of the Works; and

c) the marketing and sale of Lots.

The planning, design and construction of the works were completed prior to the appointment of the both the A Receivers and the B Receivers. Construction of the works was completed and the final inspection Certificate was issued almost a year before the appointment of the A Receivers and the B Receivers.

While A was given certain powers under the Development Agreement to market and sell the Lots, it did not undertake any marketing and selling services since the appointment of the A Receivers. Instead, B acquired all services with respect to the marketing and sale of Lots directly from third parties and incurred all costs in relation to those services. A has not made supplies of those services since the appointment of the A Receivers.

Following the appointment of the A Receivers and the B Receivers, Project Proceeds were received from the following two sources:

a) proceeds from the sale of Lots by B, inclusive of any adjustments on settlement; and

b) rent received by B for the lease of a number of residential and commercial Lots in the development pending sale.

The Development Agreement provided for the GST exclusive Project proceeds to be banked into a bank account in A's name and administered by A. However, in practice the B Receivers directed the buyer of a Lot that settled post-appointment to issue various bank cheques in respect of the Project Proceeds to make various payments to the A Receivers for and on behalf of A.

The post-appointment Project Proceeds from the lease of residential Lots by the B Receivers for and on behalf of B were banked into a bank account in A's name and administered by the A Receivers for and on behalf of A. The post-appointment Project Proceeds from the lease of commercial Lots by B were paid to B by the rental agent.

Sale Proceeds

In relation to the Project Proceeds from the sale of a Lot, the Development Agreement provided for B to retain an amount equal to the GST payable on the sale of the Lot and pay the balance of the Project Proceeds (the Development Fee) to A in consideration of the performance of its obligations under the Development Agreement.

Project proceeds were defined to include (amongst other things) the total proceeds from the sale of a Lot, inclusive of any adjustments on settlement; and any rent paid by any person for the use or occupation of, or the right to use or occupy, any Lot.

Under the Development Agreement, the obligation to pay the Development Fee crystallised upon the completion of the sale of each lot. The Development Fee was payable to A from the Project Proceeds received by B from the sale of Lots which settle post the appointment of the A Receivers and the B Receivers.

In accordance with the Development Agreement, at the end of each quarter, A invoiced B for the Development Fee, being an amount equal to the Project Proceeds received by B less GST on the sale of the Lot and other outstanding Project Costs.

While B had a contractual obligation under the Development Agreement to pay the Development Fee to A upon sale of each Lot, the A Receivers and the B Receivers agreed that the funds would be remitted directly to pay for any Project Costs and then to the secured creditor to expedite repayment to the secured creditor as efficiently as possible. Any payments made by the B Receiver of the Project Costs and to the secured creditor were made on behalf of A.

The following practical arrangements were in place in relation to the flow of funds from settlement of a sale of a Lot which occurred post the appointment of the A Receivers and the B Receivers:

a) Upon settlement, the buyer is required to pay the balance to settle, being the total purchase price plus adjustments less the deposit already paid. The Receivers and Managers of B direct the buyer to issue various bank cheques for the settlement balance amount to make the payments on behalf of B in relation to the following:

i) the GST payable on the sale to B;

ii) a distribution to the secured creditor (on behalf of A);

iii) Project Costs (on behalf of A); and

b) any remaining balance is paid to B. B is required to pay the remaining sale proceeds (the Project Proceeds) to A as part of the Development Fee pursuant to the Development Agreement; and

c) the deposit in relation to the Contract of Sale of Land is also distributed to pay Project Costs and to the Secured Creditor (on behalf of A).

Rental Proceeds

The rent proceeds received in relation to residential Lots leased by the B Receivers for and on behalf of B prior to sale were received by the A Receivers for and on behalf of A.. A issued an invoice to B and retained the rent proceeds (less any costs associated with the lease and any commission payable in respect of the rent received) as part of the Development Fee pursuant to the Development Agreement.

The rent proceeds in relation to the commercial Lots leased by B prior to sale were paid from the rental agent to B. B was required to pay the rental proceeds to A as part of the Development Fee pursuant to clause the Development Agreement (as amended).

Relevant legislative provisions

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

Division 11

Section 11-5

Section 58-10

Reasons for decision

Section 58-10 states:

A *representative of an *incapacitated entity:

• is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a *taxable supply or a *taxable importation; and

• is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a *creditable acquisition or *creditable importation; and

• has any *adjustment that the incapacitated entity would, but for this section or section 48-50, have

to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

The statutory question posed by section 58-10 is whether or not the relevant supply or acquisition falls within the scope of representative's (A Receivers) responsibility or authority for managing the incapacitated entity's (A's) affairs.

Although the Development Agreement provides for several services to be provided by A to B, its principal obligations were:

• the planning and design of the Works;

• the construction of the Works; and

• the marketing and sale of the Lots.

All planning, design, and construction of the Works (collectively referred to as Development Services in this Ruling) was completed by A prior to the appointment of the A Receivers, save for some minor work on common property which it will not perform. Although A was given certain powers under the Development Agreement to market and sell the Lots, it did not undertake any such services since the appointment of the A Receivers.

In the context of supplies of construction and building services it is our view that the planning, design and construction of the works (the Development Services) performed in accordance with the Development Agreement were supplied and completed by A in the period prior to issuance of the Final Inspection Certificate, almost a year before the appointment of the A Receivers. We therefore consider that the Development Services were supplied by A prior to the appointment of the A Receivers. Although the Development Agreement provides for A to market and sell the Lots, no such services have been provided by A to B post appointment.

As the performance of the Development Services by A predated the appointment of the A Receivers, we consider those supplies were made prior to the appointment of the A Receivers were not within the scope of the A Receivers' responsibility or authority for managing A's affairs. Accordingly, section 58-10 does not apply to make the A Receivers liable for the GST in relation to those supplies of Development Services. Rather, A (the incapacitated entity) is liable for the GST under section 9-5 and section 9-40 in relation to their supply of Development Services.

The post appointment receipt of Project Proceeds by the A Receivers for the supplies of Development Services that were made by A before their appointment does not have the effect in this case of bringing the supplies of those Development Services within the scope of the A Receivers' responsibility or authority for managing A's affairs.

The A Receivers issued invoices to B for the Development Services that were made by A before their appointment. The issuing of those invoices by the A Receivers not have the effect in this case of bringing the supplies of those Development Services within the scope of the A Receivers' responsibility or authority for managing A's affairs.

As stated above, A is liable for the GST on those supplies of Development Services and not the A Receivers. The A Receivers are only liable for GST on any supplies made post appointment which are within the scope of their authority or responsibility for managing A's affairs. As the Development Services were supplied by A pre-appointment and A has not exercised its powers to market and sell the Lots post appointment, the A Receivers are not liable for GST on the Development Services provided by A to B prior to their appointment.