Edited version of your written advice

Authorisation Number: 1013033515293

Date of advice: 4 August 2016

Ruling

Subject: GST and the supply of property

Question 1

When calculating the GST payable under the margin scheme for the sale of a developed lot to an end purchaser, what is the consideration for Entity A's acquisition of that Lot from the Government Agency? Is it the GST inclusive market value of the land?

Answer

The consideration for Entity A's acquisition of a developed lot from the Government Agency, is the GST-inclusive market value of the development works provided to the Government Agency plus monetary payments made to the Government Agency.

Question 2

Is the GST payable by Entity A on the supply of the Developer's works to the Government Agency attributable to the tax period in which an invoice is issued, but only to the extent of the amount of the consideration stated in the invoice?

Answer

No. The GST payable by Entity A on the supply of the Development works to the Government Agency is attributable to the tax period in which an invoice for the supply is issued. Where no invoice is issued in an earlier tax period, Entity A's GST liability for its taxable supply of development works is attributable to the tax period in which the freehold interest in the land is transferred to you by the Government Agency.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A (You) are registered for Goods and Services Tax (GST) and account on a non-cash basis.

You have undertaken a Project for the creation of a master-planned community. The Project will be developed on Government Agency land and will be separated into stages.

The master plan provides for the development of approximately XX residential allotments across the stages.

In addition to the residential lots, you are also responsible for development of base infrastructure (such as new roads, sewerage and other utilities) as well as recreational areas, community and retail facilities. Development commenced in XXXX and is anticipated to be completed around XXXX.

The commercial arrangement is that you will develop the area and acquire titles to the residential lots for on sale to end purchasers. You will pay the Government Agency a certain percentage of the sales proceeds on the residential lots (hereinafter referred to as the land payments) as follows:

i. Stages X and Y : %

ii. Stage Z : %

For the non-residential parts of the Development, you will develop the communal works for the Government Agency and the Government Agency will retain ownership over the common and commercial areas of the Project.

The legal and commercial arrangement underpinning the project is summarised as follows:

i. The Government Agency has always held title to the land relating to the Entity A Lots and there have been no previous sales (GST-free or otherwise) of the land relating to the Entity A Lots;

ii. The Agreement in relation to the development of land relating to the Entity A Lots is governed by the following Development Agreements (collectively referred to as the Development Agreements where appropriate):

a. The Stages X and Y Development Agreement between the Government Agency and Entity A dated XXXX (the Stage X and Y Agreement); and

b. The Stage Z Development Agreement between the Government Agency and Entity A dated XXXX (the Stage Z Agreement)

iii. Pursuant to clause X of the Development Agreements, the Government Agency granted you the following Crown Leases over the land relating to the Entity A Lots for the purposes of undertaking the works under the Agreement (collectively referred to as the Crown Leases):

a. Crown Lease for Stages X and Y

b. Crown Lease for Stage Z

iv. Clause X of the Development Agreements note that the Entity A Lots are at the risk of Entity A from the Crown Lease commencement Date. You therefore hold the development risk over the Lots from the date of issue of the Crown Leases.

v. Clause X of the Development Agreements requires you to undertake work on the land (the Developer's Works).

The Developer's Works under the Development Agreements are set out in the Entity A Works Plan (the Works Plan).

Pursuant to the Works Plan, you are required to undertake works to develop the land surrounding the Entity A Lots under the following categories:

1. Water

2. Sewage

3. Flood level and storm surge

4. Stormwater and water quality

5. Road and intersections

6. Power distribution

7. Telecommunications

8. Development Staging, temporary works and connections.

9. Landscaping and subdivision of the Lots.

vi. Under clause C of the Development Agreements, you may apply to an Appropriate Authority for a Certificate of Acceptance and Handover of Works upon completion of the Developer's Works with respect to a particular group of XX or more Lots.

vii. Clause X of the Development Agreements requires the Appropriate Authority to issue the Certificate of Acceptance and Handover of Works when it is satisfied that you have completed all such Developer's Works for such Lots.

viii. Under clause X of the Development Agreements, when you consider that all of the Developer's Works over a particular group of Lots have been completed in accordance with the Development Agreement, you may apply to the Government Agency for a Certificate of Practical Completion in relation to all those Lots.

ix. Clause X of the Development Agreements requires the Government Agency to issue the Certificates of Practical Completion when it is satisfied that you have completed all such Developer's Works for such Lots;

x. Clause X of the Development Agreements requires you to provide the Government Agency with certain documents in support of the application for Certificates of Practical Completion, including the Certificate of Acceptance and Handover of Works and all documents required for the issue of Certificates of Title;

xi. Under clause XX of the Development Agreements, you must execute and hand over to the Government Agency certain documents prior to or when applying to the Government Agency for the issue of Certificates of Title in respect of Developed Lots (including documents necessary to vest ownership of the Developer's Works related to the relevant Developed Lots in the Government Agency/ Appropriate Authority);

xii. Once the Government Agency issues the Certificate of Title in respect of a Developed Lot (which then becomes known as a Titled Lot), you will be entitled to surrender the Crown Lease in relation to the relevant Developed Lot in accordance with Clause XX of the Development Agreements;

xiii. Upon surrender of the Crown Lease (or part thereof), you are granted or entitled to be granted, a freehold interest in each Developed Lot (refer to Clause X of the Crown Leases);

xiv. You will sell each Developed Lot to an end purchaser for monetary consideration and you will transfer the relevant Certificate of Title for each Lot to the end purchaser.

In practice, most sales between the Government Agency, you and the end purchaser, are expected to take place 'back-to-back', in that the discharge of the caveat is expected to be completed by the Government Agency contemporaneously with settlement under a Contract of Sale entered into by you with an end purchaser (that is, a caveat remains over all Titled Lots until Entity A has entered into a Contract of Sale with an end purchaser [Clause X of the Development Agreement] and pays the land payment for the Titled Lot)

While there may be some Lots that remain unsold at the time you obtain the Certificates of Title, the sales price for those unsold Lots cannot exceed the prices specified in the Lot Product and Pricing Table in the Development Agreements;

xv. Clause X of Schedule X to the Development Agreements, with respect to Lot Pricing, provides that you are required to produce Lots in accordance with the Lot Product and Pricing Table. No more than once in relation to each Stage, the prices set out in the Lot Product and Pricing Table (the Lot Sale Values) may be reviewed by a party to take into account any increase in construction costs and market conditions (Clause X of Schedule X to the Development Agreements). It is expected that the Lot Sales Values will be reviewed and agreed prior to commencement of Developers Works for each Stage; and

xvi. Clause X of Schedule X to the Development Agreements provides that you will pay the Government Agency % (for stages X and Y) and % (for Stage Z) of the sale price of the Titled Lots, received from the end purchasers of the Lots, as a land payment;

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 Section 40-75,

A New Tax System (Goods and Services Tax) Act 1999 Division 75,

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 and

Tax Administration Act 1953 Section 105-65 of Schedule 1.

Reasons for decision

In this reasoning, unless otherwise stated,

• 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

Question 1

When calculating the GST payable under the margin scheme for the sale of a developed lot to an end purchaser, what is the consideration for Entity A's acquisition of that Lot from the Government Agency? Is it the GST inclusive market value of the land?

Summary

The consideration for Entity A's acquisition of a developed lot from the Government Agency, is the GST-inclusive market value of the development works provided to the Government Agency plus monetary payments made to the Government Agency. We consider that a reasonable valuation method to determine the GST-inclusive market value of the development works is a full costing of the development works undertaken as part of a competitive tender process, which takes into account the full cost of construction (including builder margins).

Similarly, a professional valuation of the land (including the development works) provided by the Government Agency to the Developer, with appropriate adjustments for any monetary consideration also provided for the land by the Developer, would also be a reasonable basis for the parties to determine and agree upon the GST-inclusive market value of the development services supplied by the Developer.

A methodology that deems the Developer's GST inclusive selling price of a titled lot to a third party as equivalent to the GST inclusive acquisition price of the lot by the Developer from the Government Agency is not reasonable.

Detailed reasoning

Division 75 allows you to use the margin scheme to calculate the GST payable on a taxable supply of real property you make by selling a freehold interest in land, selling a stratum unit; or granting or selling a long term lease, if certain requirements are met.

Pursuant to sub-section 75-10(2), the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property.

Entity A (the Developer)(You) has entered into the following Development Agreements with the Government Agency:

1. Stages X and Y Development Agreement (Agreement)

2. Stage Z Development Agreement (Agreement)

Pursuant to these Agreements, the Government Agency has granted Crown Leases over the Lease Areas to allow the Developer to enter the land and carry out development works as required under the Development Agreement.

Goods and Services Tax Ruling GSTR 2015/2 GST: development lease arrangements with government agencies (GSTR 2015/2), explains the GST treatment of transactions in the context of development lease arrangements.

It is accepted that the Agreements are development lease arrangements as described in GSTR 2015/2.

In completing the development works on the Government Agency's land, in accordance with the terms of the Development Lease arrangement, you make a supply of development services to the Government Agency.

The supply of the land to you by the Government Agency is consideration for your supply of development services if there is a sufficient nexus between the supply of the development services and the transfer of the Titled Lots.

In this case, as the transfer of Certificates of Title by the Government Agency to you is conditional on you achieving practical completion of the specified works required under the Development Agreement, there is sufficient nexus between the supply of the development services and the transfer of the land.

Therefore, the supply of the land by the Government Agency to you is consideration for the supply of the development services and the supply of the development services is, in turn, part consideration for the supply of the land by the Government Agency.

In addition to the provision of non-monetary consideration (being the development services),you may only transfer title to a Titled Lot when you have paid to the Government Agency an amount equal to % of the gross sale price of a Titled Lot in respect of Stages X and Y and % of the gross sales price of a Titled Lot in respect of Stage Z.

Valuation of non-monetary consideration

Where the consideration for supplies is non-monetary, section 9-75(1)(b) provides that the GST inclusive market value of the consideration is used to work out the price and value of that supply Where the parties to a development lease arrangement 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 parties may use a reasonable valuation method as agreed between them to determine the GST inclusive market value of any non-monetary consideration for supplies arising in the context of the development lease arrangement.

The three critical elements are:

1. The GST inclusive market value

2. An arm's length arrangement; and

3. A reasonable valuation method.

Paragraphs 70 and 71 of GSTR 2015/2 outline two methods of determining the GST inclusive market value of any non-monetary consideration for supplies arising in the context of a development lease arrangement.

Paragraph 70 provides that the full costing of the development works, undertaken by the developer as part of a competitive tender process, which takes into account the full cost of construction (including builder margins), provides a reasonable basis for determining the GST inclusive value of development services by the developer.

Similarly, a professional valuation of the land (including the development works) provided by the government agency to the developer, with appropriate adjustments for any monetary consideration also provided for the land by the Developer, would also be a reasonable basis for the parties to determine and agree upon the GST inclusive market value of the development services supplied by the developer. It would also provide a reasonable basis for calculating the price of the government agency's related supply of land.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6) explains how the GST Act applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, if it is non-monetary consideration).

Paragraph 139 provides that as the GST inclusive value of consideration will be shown as the price on any tax invoice that the supplier issues, the onus for determining the GST inclusive market value of the consideration rests with the supplier.

In your case, you have the onus of determining the GST inclusive market value of the development services at the time of the supply (in your case, following Practical Completion when freehold title to the land is transferred to you) - whether or not the final sale of a Lot will take place contemporaneously with the transfer of the Lot from the Government Agency.

Paragraph 141 goes on to explain that market value is regarded as the price that would be negotiated at a specified time between a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller acting at arm's length in an appropriate market. It is an objective test and not the subjective view of any one party.

Paragraphs 159 to 165 of GSTR 2001/6 discusses the time when the GST market value of non-monetary consideration is worked out. Paragraph 160 states:

The GST Act does not specify the time when the market value of non-monetary consideration is to be ascertained for the purposes of working out the value of a the supply under paragraph 9-75(1)(b). We consider that the time must be reasonable in the circumstances of a particular transaction. Depending on the circumstances, it may be:

• When parties enter into a binding agreement

• When economic risk is transferred; or

• When a recipient assumes effective control.

Paragraph 161 of GSTR 2001/6 goes on to say that you must be able to demonstrate that these times, or another time at which you value the consideration, is reasonable in your particular circumstances.

In your case, we do not consider that the methodology proposed for determining the value of the non-monetary consideration for the Development Works supplied to the Government Agency, is reasonable as it fails to reflect the commercial reality of the arrangement.

Paragraphs 80 to 83 of GSTR 2015/2 discusses the methodology for determining the price of taxable supplies made under a development lease arrangement when the consideration comprises both monetary and non-monetary consideration. Paragraphs 82 and 83 state:

82. Because the land is supplied by the government agency in exchange for both the monetary payment and the development services, the GST inclusive market value needs to be apportioned to determine the price of the supply of development services made by the developer. The apportionment is made by deducting the amount of monetary payment from the GST inclusive market value of the land supplied by the government agency.

83. In turn, consideration for the government agency's supply of the land is determined by adding together the amount of the monetary payment and the GST inclusive market value of the development services supplied by the developer.

You propose to value the Developers Works by reference to the Lot Product and Pricing Table determined prior to the commencement of a Stage. You intend to deduct from the price of a Lot (as outlined in the Lot Product and Pricing) the monetary consideration paid for the relevant Lot as per the guidance in paragraph 82 of GSTR 2012/5.

Clause X of Schedule X Special Conditions to the Development Agreements (Schedule X) deals with Lot Pricing. It provides that you are required to produce Lots in accordance with the Lot Product and Pricing Table. No more than once in relation to each Stage, the prices set out in the Lot Product and Pricing Table ( the Lot Sale Values) may be reviewed by a party to take into account any increase in construction costs and market conditions (Clause X of Schedule X to the Development Agreements). It is expected that the Lot Sales Values will be reviewed and agreed prior to commencement of Developers Works for each Stage.

It is clear from this clause that, although the Price of the Lots may be reviewed once for any increase in construction costs and market conditions, that it is the Government Agency who have determined the Lot Product and Pricing Schedule and that this Schedule is not objectively determined by both parties. Further, Schedule X outlines that in some cases (for example, Lots sold to Entity B), the sale price of a Lot will be below market value.

Where the price of a Lot does not equate to a GST inclusive market value at the relevant time (in your case, following Practical Completion when freehold title to the land is transferred to the Developer), this will not be an acceptable basis on which to determine the non-monetary consideration for the development works supplied by the Developer to the Government Agency.

Further, a methodology that uses an equivalent GST inclusive price, as for the sale of a developed Lot to a third party, to calculate the GST inclusive price of the Developer's services to the Government Agency, is not reasonable. It implies that the Developer is not obtaining any commercial benefit from its engagement in this venture.

In your case, prior to entering into the arrangement, the project modelling would have estimated/considered costs, profit margins and variables relevant to the arrangement as you have control over the works (and pay for those works) that must be undertaken to achieve practical completion. This would be commercial reality.

It should be noted that the market value of the development services will not be the same as your cost of undertaking those services unless your profit margin is nil - something that would not be in line with commercial practice.

Consequently, we consider that a full costing of the Development Works, undertaken by you as part of a competitive tender process, which takes into account the full cost of construction (including builder margins), provides a reasonable basis for determining the GST inclusive value of development services by you to the Government Agency.

While this method is an effective way of working out the market value of your services, thus eliminating the need to obtain a professional valuation of either the land or development works, we acknowledge that this may not be possible in all cases. Accordingly, we will also accept a professional valuation of either the land or development works that takes into consideration the particular circumstances of your arrangement with the Government Agency.

Paragraph 144 of Goods and Services Tax Ruling GSTR 2001/6 Goods and Services Tax: non-monetary consideration supports this approach and states:

144. You may determine the GST inclusive market value of non-monetary consideration for a taxable supply by applying a method that produces a reasonable GST inclusive market value of the consideration. There will be situations where the methods used by parties differ according to their particular circumstances. Examples of reasonable methods include:

•   the market value of an identical good, service or thing;

• the market value of a similar good, service or thing;

• the market value of the supply; or

• a professional appraisal.

Question 2

Is the GST payable by Entity A on the supply of the Developer's works to the Government Agency attributable to the tax period in which an invoice is issued, but only to the extent of the amount of the consideration stated in the invoice?

Under section 29-5, the GST payable on taxable supplies is attributable to the earlier of:

a. The tax period in which any consideration is received for the supply; or

b. The tax period in which the invoice that relates to the supply is issued.

Non-monetary consideration, comprising the supply of the development services by the Developer, is not provided (either in full or in part) until the conditions specified in the development agreement are met and the Developer is entitled to the supply of the land.

In circumstances where no monetary consideration has been provided in an earlier tax period and no invoice has been issued in an earlier tax period, the developer's GST liability for its taxable supply of development services is attributable to the tax period in which the freehold or long-term leasehold interest in the land is transferred.

A document issued by the Developer to a Government Agency on entry into a development lease arrangement or at any time afterwards, notifying the government agency of an obligation to supply the land subject to the development works being completed is an invoice as defined in section 195-1.

If none of the consideration (monetary or non-monetary) for the Developer's supply of development services has been received by the Developer in an earlier tax period, the Developer's GST liability for its taxable supply of development services is attributable to the tax period in which the invoice is issued.

In your ruling application, you have referenced the deferred attribution rules in paragraph 29-25(2)(e). Pursuant to paragraph 170 of GSTR 2000/29, the determination only applies where the total consideration for the supply is expressed as an amount of money. Accordingly, the determination is not applicable in your circumstances.