Edited version of your written advice

Authorisation Number: 1013026989625

Date of advice: 10 June 2016

Ruling

Subject: GST and cash bonds

Question

Are cash bonds received from developers that are called up for contract failure consideration for any taxable supply made by you?

Answer

The taxable status depends on the type of supply that is being made.

This ruling applies for the following periods:

01/07/2015 to 01/07/2016

Relevant facts and circumstances

You are a Council and registered for goods and services tax (GST).

There are various development applications affecting your land that may require you to hold cash bonds lodged by the developers. These bonds provide you with a guarantee that subdivision or development conditions are met, damage to any Council assets are repaired, and that you have sufficient funds to complete or repair works should the developer fail to do so.

The cash bonds are held in trust until the contract has been completed. If the money is called upon due to contract failure, the funds are treated as income.

Relevant legislative provisions

A New Tax System (Goods and Service Tax) Act 1999; Section 9-5

A New Tax System (Goods and Service Tax) Act 1999; Section 9-10

A New Tax System (Goods and Service Tax) Act 1999; Section 9-15

A New Tax System (Goods and Service Tax) Act 1999; Section 9-39

A New Tax System (Goods and Service Tax) Act 1999; Division 81

A New Tax System (Goods and Services Tax) Regulations 1999; Regulation 81-10.01

A New Tax System (Goods and Services Tax) Regulations 1999; Regulation 81-15.01

Income Tax Assessment Act 1997 (ITAA 1997); Section 995-1

Reasons for decision

GST is payable on taxable supplies.

Section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act) states that:

You make a taxable supply if:

● you make the supply for consideration; and

● the supply is made in the course or furtherance of an enterprise that you carry on; and

● the supply is connected with the indirect tax zone; and

● 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.

The first criterion that needs to be determined is whether there is a supply for consideration.

Section 9-39 provides special rules in relation to making taxable supplies. In particular, item 8 in the table in section 9-39 provides that where there is a payment of taxes, fees and charges the special rules in Division 81 may apply. As you are a local government council, we have to consider these special rules for supplies you make as a consequence of the cashing in of these bonds.

Division 81

Division 81 was amended with effect from 1 July 2011 to allow entities to self assess the GST treatment of a payment of an Australian tax or an Australian fee or charge in accordance with certain principles.

Under the transitional arrangements, those Australian taxes, fees and charges that were not subject to GST under the A New Tax System (Goods and Service Tax ) ( Exempt Taxes, Fees and Charges) Determination 2011 (No. 1 ) (Treasurer’s Determination) remain not subject to GST until 30 June 2013 and thereafter will be assessed under Division 81 as amended.

The GST treatment of all Australian taxes or Australian fees or charges that were not listed in the Treasurer’s Determination will be self assessed under the changes made to Division 81 with effect from 1 July 2011.

Australian Tax

Section 81-5 considers the effect of the payment of a tax. It states:

81-5 Effect of payment of tax

Australian tax not consideration

(1) A payment, or the discharging of a liability to make a payment, is not the provision of *consideration to the extent the payment is an *Australian tax.

Regulations may provide for exceptions

(2) However, a payment you make, or a discharging of your liability to make a payment, is treated as the provision of *consideration to the extent the payment is an *Australian tax that is, or is of a kind, prescribed by the regulations.

(3) For the purposes of subsection (2), the *consideration is taken to be provided to the entity to which the tax is payable, for a supply that the entity makes to you.

The term ‘Australian tax’ is defined in section 195-1 as:

Australian tax means a tax (however described) imposed under an *Australian law.

Australian Fees and Charges

Sections 81-10 and 81-15 consider the effect of certain fees and charges and state:

81-10 Effect of payment of certain fees and charges

Certain fees and charges not consideration

(1) A payment, or the discharging of a liability to make a payment, is not the provision of *consideration to the extent the payment is an *Australian fee or charge that is of a kind covered by subsection (4) or (5).

Prescribed fees and charges treated as consideration

(2) However, a payment you make, or a discharging of your liability to make a payment, is treated as the provision of consideration to the extent the payment is an *Australian fee or charge that is, or is of a kind, prescribed by the regulations.

(3) For the purposes of subsection (2), the consideration is taken to be provided to the entity to which the fee or charge is payable, for a supply that the entity makes to you.

Fees or charges paid for permissions etc.

(4) This subsection covers a fee or charge if the fee or charge:

(a) relates to; or

(b) relates to an application for;

the provision, retention, or amendment, under an *Australian law, of a permission, exemption, authority or licence (however described).

Fees or charges relating to information and record-keeping etc.

(5) This subsection covers a fee or charge paid to an *Australian government agency if the fee or charge relates to the agency doing any of the following:

(a) recording information;

(b) copying information;

(c) modifying information;

(d) allowing access to information;

(e) receiving information;

(f) processing information;

(g) searching for information.

81-15 Other fees and charges that do not constitute consideration

The regulations may provide that the payment of a prescribed *Australian fee or charge, or of an Australian fee or charge of a prescribed kind, or the discharging of a liability to make such a payment, is not the provision of *consideration.

The term ‘Australian fee or charge’ is defined in section 195-1 as:

Australian fee or charge means a fee or charge (however described), other than an Australian tax, imposed under an *Australian law and payable to an *Australian government agency.

Australian Law

The term ‘Australian law’ is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and relevantly includes a State law. It includes acts and law making powers which are delegated by parliaments, such as regulations, by-laws, proclamations and orders made under Acts. Therefore, the LG Act is an Australian law.

Australian Government Agency

The term ‘Australian government agency’ is defined by section 995-1 of the ITAA 1997. ‘Australian government agency’ means:

● the Commonwealth, a State or Territory; or

● an authority of the Commonwealth or of a State or a Territory.

For the purposes of this Ruling, it is accepted that Council comes within the definition of an Australian government agency.

GST Regulations – a fee or charge that is consideration for a supply

Certain fees and charges are prescribed by Regulation 81-10.01 of the GST Regulations and are treated as consideration under subsection 81-10(2). Of relevance to this ruling are the following paragraphs:

Paragraph 81-10.01(1)(g) of the GST Regulations specifies ‘a fee or charge for a supply of a non-regulatory nature. In relation to this paragraph the explanatory statement to the A New Tax System (Goods and Services Tax) Amendment Regulation 2012 (No. 2) (ES) states:

This paragraph ensures that the non-regulatory activities of government are subject to GST. This paragraph applies to supplies of goods and services for which fees are imposed where the consumer is provided with something that lacks a regulatory character. That is, the fee or charge does not arise under an Australian law which is intended, for example, to regulate behaviour, ensure consumer protection and ensure compliance with certain standards...

The ES provides examples of fees and charges that do not have a regulatory character. Paragraph 81-10.01(1)(h) of the GST Regulations specifies:

(h) a fee or charge for a supply by an Australian government agency, where the supply may also be made by a supplier that is not an Australian government agency.

The ES explains:

This paragraph ensures that the regulatory activities of government made in competition with the private sector are subject to GST where the other requirements of section 9-5 of the Act are satisfied. Fees and charges in this category are not excluded from being consideration for a taxable supply. This is consistent with the National Competition and Consumer Policy guidelines and ensures that a government entity is not given a competitive advantage over a private sector supplier making the same type of supply.

This covers situations in which government agencies have authorised private agencies to perform activities that form part of a regulatory process, for example, certification activities which are required for a regulatory process to be followed. Where government agencies, as well as government certifiers, have authorised private certifiers to perform certification activities these fees and charges will continue to be consideration for a supply that is subject to GST. This ensures competitive neutrality between supplies made by government and non-government agencies.

GST Regulations – a fee or charge that is not consideration for a supply

Regulation 81-15.01 of the GST Regulations sets out those fees and charges that are prescribed for section 81-15 and which do not constitute consideration.

81-15.01 Fees and charges which do not constitute consideration

(1) For section 81-15 of the Act, the following kinds of Australian fees and charges are prescribed:

(a) a fee or charge for:

(i) the kerbside collection of waste; or

(ii) the supply, exchange or removal of bins or crates used in connection with kerbside collection of waste;

(b) royalties charged in relation to natural resources;

(c) a fee or charge imposed on an industry to finance regulatory or other government activities connected with the industry;

(d) a fee or charge to compensate an Australian government agency for costs incurred by the agency in undertaking regulatory activities;

(e) a fee or charge imposed in relation to a court, tribunal, commission of inquiry or Sheriff’s office;

(f) a fee or charge for a supply of a regulatory nature made by an Australian government agency;

(g) a fee or charge for entry to a national park;

(h) any other fee or charge:

(i) specified in the A New Tax System (Goods and Services Tax) (Exempt Taxes, Fees and Charges) Determination 2011 (No. 1), as in force immediately before the commencement of Schedule 4 to the Tax Laws Amendment (2011 Measures No. 2) Act 2011; and

(ii) imposed before 1 July 2013.

Of relevance to this ruling are the following paragraphs:

Paragraph 81-15.01(1)(d) of the GST Regulations ‘a fee or charge to compensate an Australian government agency for costs incurred by the agency in undertaking regulatory activities. The ES states:

This paragraph ensures that fees and charges which are for services provided on a cost recovery basis by government agencies, and relate to activities that are regulatory in nature, are not treated as the provision of consideration and therefore do not give rise to a taxable supply…

Paragraph 81-15.01(1)(f) of the GST Regulations refers to ‘a fee or charge for a supply of a regulatory nature made by an Australian government agency.’

The term ‘regulatory nature’ is not defined in the GST Regulations or the GST Act. The ES states:

The term ‘regulatory’ captures those supplies made by a government agency, where that agency is legislatively empowered to make the relevant supply and the supply is to satisfy a regulatory purpose.

In some instances, although the consumer acquires something that may be of intrinsic value to the consumer, the acquisition is made in the context of satisfying a regulatory requirement of an Australian law…

Paragraph 81-15.01(1)(h) of the GST Regulations refers to any other fees or charges:

● specified in the Treasurer’s Determination as in force immediately before the commencement of Schedule 4 of the Tax Laws Amendment (2011 Measures No. 2) Act 2011, and

● imposed before 1 July 2013 as not constituting consideration.

ATO view on Division 81 and Regulation 81 of the GST Act

Class Ruling CR 2013/32 Goods and services tax: GST treatment of Australian fees and charges imposed by NSW Councils for supplies in relation to building and property development applications and other related permits and approvals (CR 2013/32).

While the ATO view expressly applies to NSW Councils, the view would be indicative of its application of Division 81 and Regulation 81 of the GST Act in relation to other Councils.

The table in CR 2013/32 sets out the GST treatment in various scenarios. Relevant examples include:

*Appendix 1: Note 1

Where fees and charges can be provided in a competitive market by an entity that is a non Australian government agency they are not exempt under Division 81. These supplies may satisfy subsection 81-10(4) as being the provision of a permission or paragraph 81-15.01(1)(f) of the GST Regulations as being for a supply of a regulatory nature by virtue of section 81-15, however, subregulation 81-15.02(2) applies to treat the payment as being for consideration if the fee or charge is also covered by paragraph 81-10.01(1)(h) of the GST Regulations.

Paragraph 81-10.01(1)(h) of the GST Regulations is about a fee or charge for a supply that can also be made in a competitive market by an entity that is not an Australian government agency

Bonds

Bonds held by Council in relation to development projects are treated as guarantees that the subdivision or development conditions are met, protect Council against damages to Council property and damage to Council assets are repaired.

Subsection 99-5(1) provides that a deposit held as security for the performance of an obligation is not treated as consideration for a supply, unless the deposit:

● is forfeited because of a failure to perform the obligation, or

● is applied as all or part of the consideration for a supply.

GSTR 2006/2 provides guidance on GST and deposits held as security for the performance of an obligation. It discusses the characteristics of a security deposit to which Division 99 applies and explains the meaning of a security deposit and the special rules for the attribution of GST on taxable supplies relating to security deposits.

For a payment to be considered a ‘security deposit’ for the purposes of Division 99, paragraph 20 of GSTR 2006/2 states that it should have the following characteristics:

● be held as a security for the performance of an obligation

● the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit

● be at risk of forfeiture upon failure to perform the obligation; and

● be a reasonable amount.

Where the deposit is refunded in full there are no GST consequences. Where the deposit is forfeited, the payment is applied to the underlying supply (the obligation that has not been satisfied) and the applicable application of GST to that supply. If the underlying supply is either GST-free or input taxed, the forfeited deposit will not be consideration for a taxable supply.

Fees and charges which are for services provided on a cost recovery basis by government agencies, and relate to activities that are regulatory in nature, are not treated as the provision of consideration under paragraph 81-15.01(1)(d) of the GST Regulations and therefore do not give rise to a taxable supply.

Where Council equipment is lost or damaged, the Council may have a right to claim damages from the lessees for the cost or replacement value of the equipment. A charge to recover the replacement cost of Council equipment is not regulatory in nature even if the equipment damaged or lost was used in undertaking regulatory activity. Recovery of costs in these circumstances will not be consideration for a taxable supply.

On the other hand, where a contractual condition is not met by the developer, for example, various constructions such as an access road and the Council has to do this itself or contract it out, this is not regulatory in nature and obtaining a cash bond for this purpose is treated as the provision of consideration for a taxable supply by the Council.