Edited version of your written advice

Authorisation Number: 1013104544371

Date of advice: 31 October 2016

Ruling

Subject: Goods and Services Tax - Property

Question 1

Will Entity A and Entity B make taxable supplies to each other under the Agreement?

Answer

Yes

Entity A will be making a taxable supply of freehold land to the Entity B.

Entity B will be making a taxable supply of development services to Entity A.

Question 2

Will Entity A and Entity B make creditable acquisitions from each other under the Agreement?

Answer

Yes.

Entity A will be making a creditable acquisition of development services from Entity B.

Entity B will be making a creditable acquisition of land from Entity A.

Question 3

What is the consideration for the respective taxable supplies?

Answer

The consideration for Entity B's supply of development services is the supply of the land, the GST inclusive market value of which may be determined with reference to the detailed financial modelling provided at the bidding stage of the project (full costing) plus an amount for GST.

The consideration for Entity A's supply of land is the GST inclusive market value of development services (GST inclusive full costing) and GST inclusive Fee C.

Question 4

To which tax period are taxable supplies and creditable acquisitions attributed?

Answer

In the tax period in which the respective tax invoices are issued. As the tax invoices will be exchanged in the same tax period, the taxable supplies for both parties are attributable to the same tax period. Any entitlement to input tax credits that the parties are entitled to for their acquisition of development services or the acquisition of the land are also attributable to that same tax period.

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.

The precinct is approximately x ha and is located in x. The precinct incorporates approximately x ha of land.

The Agreement

On ddmmyy Entity A entered into the Agreement with Entity B.

Under the terms of the Agreement Entity B will develop the precinct which only contains residential apartments.

As part of the bidding process detailed proposals including detailed financial modelling of the plans were provided. The full costing of the development services includes the full cost of construction (including builder margins) and associated costs.

The estimated cost of construction of these items is approximately $x (exclusive of GST). This amount comprises the estimated costs associated with the works to be performed by Entity B under the Agreement and includes:

a. Demolition costs

b. Design and construction costs; and

c. Capital Project Costs.

Entity A is, or will be, the owner of the land leased under the development leases and will subsequently transfer the freehold parcel to Entity B.

Entity B is also required to pay Fee C.

It is anticipated that the residential precinct will be developed by Entity B and the properties sold to third parties.

Entity A may issue an early works licence. Entity A will grant tenure over the land by granting a development lease for the period of the development and will transfer freehold title in respect of the precinct to Entity B.

Entity A is registered for GST.

Entity B is registered for GST.

Both entities account for GST on a non-cash basis.

Entity B and Entity A will exchange tax invoices prior to or on x date for their respective taxable supplies under the Agreement.

The parties have not agreed to use the margin scheme.

Further relevant information was provided by email dated ddmmyy.

Assumption:

The residential premises will be supplied by Entity B as new residential premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-75,

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

A New Tax System (Goods and Services Tax) Act 1999 Division 149,

A New Tax System (Goods and Services Tax) Act 1999 Division 184 and

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

Reasons for decision

Question 1

Detailed reasoning

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (Australia), 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.

Entity A owns/will own the land to be leased under the development leases to the Entity B for the completion of works. On completion, Entity A will grant the freehold interest in the land to Entity B in respect of the relevant portions of the precinct that relate to the Agreement.

It is contended that as Entity A has ownership of the land and the primary responsibility for delivery of the obligations under the Agreement through granting tenure over the land and transferring the freehold interest, it is making a supply in respect of the development.

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

The basic rules require the supplier to make the supply and generally the recipient to acquire the supply. GST on a taxable supply is payable by the supplier who is registered or required to be registered for GST.

Proposition 1 states that for every supply there is a supplier. This refers to the entity which makes the supply or is capable of making the supply.

Goods and Services Tax Ruling GSTR 2015/2 GST: development lease arrangements with government agencies, explains the GST treatment of transactions in the context of development lease arrangements. From the facts provided this is an arrangement to which GSTR 2015/2 applies.

In this instance Entity A has ownership of the land and the obligation to grant the development leases and transfer the freehold interest in the land to Entity B.

In granting the development lease and transferring the freehold title under the arrangement, Entity A is making a supply of land to Entity B and Entity B makes a corresponding acquisition of land.

In completing the development works on the land, in accordance with the terms of the development lease arrangement, Entity B makes a supply of development services to Entity A and Entity A makes a corresponding acquisition of development services.

Supplies for consideration

The supply of the land by Entity A to Entity B is non-monetary consideration for the supply by the Entity B of their development services if there is a sufficient nexus between the supply of the development services and the supply of the land.

In this case, the development leases are granted for the purpose of undertaking the development. Once the acceptance notice for a stage is issued, Entity A must transfer the freehold title to the Entity B. As the transfer of the freehold title to the Entity B is conditional on their fulfilling the development requirements under the Agreement, there is sufficient nexus between the supply of the development services and the supply of the land.

Therefore, the supply of the land by Entity A to Entity B is non-monetary consideration for the supply of the development services and the supply of the development services is, in turn, non-monetary consideration for the supply of the land by Entity A.

The supply of the land is also dependant on the payment by Entity B to Entity A of a non-refundable amount known as Fee C once certain conditions have been satisfied. Therefore the payment of this amount is also consideration for the supply of the land by Entity A.

As Entity A and Entity B are making supplies for consideration and all the other requirements of section 9-5 are satisfied, Entity A makes a taxable supply of land to Entity B and Entity B makes a taxable supply of development services to Entity A.

Question 2

Detailed reasoning

In granting the development lease and transferring the freehold title under the arrangement, Entity A is making a supply of land to Entity B and the Entity B makes a corresponding acquisition of land.

In completing the development works on the land, in accordance with the terms of the development lease arrangement, Entity B makes a supply of development services to Entity A and Entity A makes a corresponding acquisition of development services.

Section 11-5 states that you make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose;

(b) the supply of the thing to you is a taxable supply;

(c) you provide, or are liable to provide consideration for the supply; and

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

In this case both Entity A and Entity B make their acquisitions for a creditable purpose. Furthermore, the relevant transactions under the Agreement satisfy the requirements of paragraphs 11-5(b) and 11-5(c) and both entities are registered for GST. Therefore, where Entity A and Entity B make the acquisitions identified in the Agreement, they will be making creditable acquisitions.

Question 3

Detailed reasoning

In question 1 it was determined that

● The supply of the land by the Entity A to Entity B is non-monetary consideration for the supply of the development services and the supply of the development services is, in turn, non-monetary consideration for the supply of the land by Entity A.

● The supply of the land is also dependant on the payment by Entity B to Entity A of a Fee C. Therefore the payment of this amount is also consideration for the supply of the land by Entity A.

The amount of GST on a taxable supply is 10% of its value (value being 10/11ths of the price of the taxable supply). GST is therefore payable at 1/11th of the price of the supplies made under the Agreement.

Section 9-75(1) provides that

price is the sum of:

(a) so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply)

(b) so far as the consideration is not expressed as an amount of money - the GST inclusive market value of that consideration

Goods and Services Tax Ruling GSTR 2001/6 GST: non-monetary consideration 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 31 notes that if the consideration is wholly (or partly) non-monetary, you need to establish the GST inclusive market value of the non-monetary portion of the consideration (and add it to the monetary amount) to work out the price of the supply.

We accept that Entity A and Entity B are dealing with each other at arm's length and so they may use a reasonable valuation method as agreed between them to determine the GST inclusive market value of the non-monetary consideration for supplies arising in the context of the development lease arrangement.

Methods are outlined for ascertaining the GST inclusive market value of non-monetary consideration in GSTR 2015/2 paragraphs 68 -71. Paragraph 70 states:

70 … the full costing of the development works, undertaken by the developer as part of the competitive tender process, which takes into account the full cost of construction (including builder margins) provides a reasonable basis for determining the GST-inclusive market value of the supply of development services by the developer. It also provides a reasonable basis for calculating the price of the government agency's related supply of land…

As part of the tender process Entity B provided detailed financial modelling of their plans, which included the full cost of construction (including builder margins) and associated costs (full costing) and were exclusive of GST. We consider that these costings provide a reasonable basis for determining the GST inclusive market value of the non-monetary consideration for the development services provided by Entity B. They will also provide a reasonable basis for calculating the price of the supply of the land by Entity A as explained at paragraph 83 of GSTR 2015/2.

Accordingly, the GST inclusive market value of the development services supplied by the Entity B (and hence the price) may be determined with reference to the full costing provided at the bidding stage. (Based on the facts provided, as the full costing is GST exclusive, the GST inclusive market value will be determined by reference to the full costing plus GST) (for example $... plus 10%). GST is payable at 1/11^th of the price of this supply. Entity A will make a corresponding acquisition of the services for the same price.

The Agreement provides that the monetary consideration payable is exclusive of GST. Therefore, the price for the supply of the land by Entity A to Entity B comprises GST inclusive Fee C (for example $... plus 10%) + the GST inclusive market value of the development services (full costing plus GST) ($... plus 10%). Entity B will make a corresponding acquisition of the land for the same price.

Question 4

Detailed reasoning

The parties account for GST on a non-cash basis and therefore attribution of all of the GST liability on a taxable supply is required in the tax period in which a monetary payment is received, some or all of the non-monetary consideration is received or an invoice is issued, whichever is earlier.

The Agreement is subject to the fulfilment of conditions prior to entitlement of Entity A to receive payments or to require Entity B to undertake development works. Clause x of the Agreement acknowledges that the condition required to be satisfied is not within the control of Entity A. Accordingly, the Agreement does not notify the developer of a presently existing obligation to pay or to undertake the development works and so does not constitute an invoice.

Once the conditions are met the parties will exchange tax invoices for their respective obligations arising under the Agreement. A tax invoice that notifies of an obligation to make a payment satisfies the definition of 'invoice' in section 195-1. Neither party has provided monetary or non-monetary consideration for the supply of the development services or the supply of the land in an earlier tax period.

As the tax invoices will be exchanged in the same tax period, the GST liabilities for both parties are attributable to the same tax period. Any entitlement to input tax credits that the parties are entitled to for their acquisition of development services or the acquisition of the land are also attributable to that same tax period.

Cost variation

Where the parties have agreed, on a reasonable basis, to the GST inclusive market value of the development services, a change in the market value will not give rise to an adjustment under Division 19. However, if the terms of the Agreement are changed substantially in respect of the nature, scope or extent of the works undertaken by the Operating Trust, there may be an adjustment event under Division 19.