Edited version of your written advice

Authorisation Number: 1051233715066

Date of advice: 20 November 2017

Ruling

Subject: Consideration

Question 1

Is the consideration for a supply by you of real property under the Proposed Model limited to the ‘Adjusted Sales Price’?

Answer

No. The consideration for a supply by you of real property under the Proposed Model is not limited to the ‘Adjusted Sales Price’.

This ruling applies for the following periods:

This ruling applies to the Proposed Model and does not apply to a tax period.

The scheme commences on:

This ruling applies to the Proposed Model and does not have a commencement date.

Relevant facts and circumstances

(1) You are registered as a charity on the Australian Charities and Not-for-profits Commission (ACNC) register.

(2) You are registered for goods and services tax (GST) and are an endorsed charity for GST purposes.

(3) You are considering implementing a new model to provide affordable housing (‘Proposed Model’). You wrote to the Commissioner asking for an application for a private ruling in relation to Proposed Model. Your advised the following in relation to the Proposed Model:

(i) You will purchase an apartment from a developer in an arm’s length arrangement.

(ii) You identify an individual or individuals as a prospective purchaser(s) (the Home Owner) and your eligibility criteria aligns with the National Rent Affordability Scheme (NRAS) eligibility criteria.

(iii) You enter into a contract of sale to sell real property to the Home Owner. The contract is for the same price which you paid for the purchase of the real property and includes a special condition which requires the Home Owner to enter in an agreement which details the Proposed Model arrangements (Arrangements).

(iv) The contracted amount payable by the Home Owner at settlement is reduced on settlement day by an adjustment. The adjustment reduced the contract amount payable to an amount which is less than 75% of what you paid to purchase the apartment. You refer to the reduced amount payable at settlement is the ‘adjusted sales price’.

(v) A financial institution will advance funds by way of loan to the Home Owner, and the funds are sufficient for the Home Owner to complete the purchase of the real property from you. The financial institution will also register a ‘first’ mortgage over the apartment.

(vi) You register a ‘second’ mortgage as security over the real property which secures your interest in the rights provided to you under the agreement.

(vii) The Home Owner is required to sign a contract of sale, the Proposed Model Agreement and the mortgages.

(4) The Agreement includes a call option component and also states the Home Owner is required to pay an option removal fee (Fee) when certain events are triggered.

(5) You advised:

● The option stays in place as long as the Home Owner satisfies the Proposed Models’ eligibility requirements or until the Home Owner wants the option removed.

● If the Home Owner pays out the mortgage, then, you presume the Home Owner is no longer in housing need and therefore not eligible to receive continued charitable support from you.

● The option removal fee is priced to prevent a Home Owner taking advantage of any ‘discount’ that could otherwise arise if the Home Owner ceased being eligible under the Arrangement or otherwise wanted to exit the arrangement.

● If the Home Owner continues to be eligible under Arrangement, and does not seek to exit the Arrangement, the charitable objectives remain, and no option removal fee needs to be paid.

● The Fee is to secure compliance with your ongoing charitable objectives.

● The Agreement sets out the consequential options and steps should the Home Owner no longer satisfy the eligibility requirements. (page 5)

Relevant legislative provisions

Section 9-10 of the A New Tax System (Goods and Services Tax Act 1999 (GST Act)

Section 9-15 of the GST Act

Reasons for decision

You are considering implementing a new model which you state will provide affordable housing (‘Proposed Model’) to identified recipients.

We have reviewed the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) together with our published ATO view documents to identify what you are supplying and how consideration (for the purposes of the GST Act) applies to your Proposed Model.

What do you supply?

Your activities as part of the Proposed Model include selling an apartment to a Home Owner who is required to enter into the Proposed Model’s Agreement and you register a (second) mortgage.

Subsection 9-10(1) of the GST Act provides a supply is any form of supply whatsoever. Section 9-10(2) of the GST Act provides, without limiting subsection 9-10(1) of the GST, supply includes a supply of goods), a grant, assignment or surrender of real property, an entry into or release from an obligation, whether isolated or in combination or a combination of 2 or more of these matters, amongst other things.

Do you make one or more supplies?

A supply can include multiple components. Additionally a transaction can involve more than one supply.

Goods and Services Tax Ruling GSTR 2006/9: Supplies examines the meaning of ‘supply’ and discusses different propositions that are considered relevant in analysing a transaction in relation to a supply including:

….

Proposition 10: It is necessary to analyse the transaction that occurs, not a transaction that might have occurred.

…

Proposition 16: the total fact situation will determine the nature of the transaction, the entity that makes a supply and the recipient of the supply.

…

222. Where the parties to the transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

223. Australian courts have held that an arrangement between the parties will be characterised not merely by the description the parties give to the arrangement, but by looking at the transactions entered into and the circumstances in which the transactions are made. …

…

Circumstances where you need to consider the total fact situation:

226 The circumstance in which the agreement will not represent the total fact situation include where it:

● …

● May form part of a series of interrelated documents (a transaction should not be considered in insolation); or

● …

We consider the following documents and clauses to be relevant to considering your question:

● You and the Home Owner enter into a Sale Contract for the apartment. You advised the contract will be aligned with standard ‘Real Estate Institute of a relevant State or Territory’ terms and conditions.

● The Home Owner is required to enter into the Proposed Model’s Agreement at the same time as entering into the contract of sale. You advised a special clause will be added to the sale contract requiring the Home Owner to enter into the Agreement.

● You will register a (second) mortgage over the real property that you sell and this mortgage secures your interest in the Arrangement.

Based on the above information (1) to (4), we are satisfied you are making one supply when you sell the apartment to the Home Owner pursuant to section 9-10(2)of the GST Act.

Your supply includes different components and activities including the entering into the Sale Contract and the Agreement and the registration of your (second) mortgage. We conclude these components are intrinsically linked so that one cannot happen without the other as:

● The Home Owner is unable to purchase the real property from you, unless the Home Owner enters into the Agreement and satisfies the eligibility criteria.

● The does not stand on its own as the Home Owner would not enter into the Agreement, unless he/she was purchasing the real property.

● The Home Owner is required to sign a (second) mortgage which you register.

● The entering into the contractual arrangements enables the registered ownership of the real property to move from you to the Home Owner.

Consideration for your supply:

Section 195-1 of the A New Taxation System (Goods and Services Tax) Act 1999 (GST Act) states:

consideration, for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition.

Consideration is not limited to an amount of money which is paid and can include both monetary and non-monetary components. Section 9-15 of the GST Act which is relevant to your circumstances, provides:

(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 GSTR 2001/6: 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 monetary consideration (that is, if it is non-monetary consideration). GSTR 2001/6 states:

12 A ‘payment’ is not limited to a payment of money. 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 [emphasis added]

● entering into an obligation, for example to refrain from selling a particular product (a forbearance). [emphasis added]

...

14. In some transactions, particularly those involving money only, the consideration is readily apparent. However, where there is monetary consideration for a supply, it does not necessarily follow that there is no other consideration for the supply. If you receive any non-monetary consideration for a supply, the price includes the GST inclusive market value of that consideration.

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. [emphasis added]

...

80. ... the test for determining whether a payment is consideration for a supply is whether there is sufficient nexus between the supply and the payment. Consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. .... [emphasis added]

81. For a thing to be treated as a payment for a supply it must have economic value and independent identity provided as compensation for the making of the supply. That is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire. ... [emphasis added]

82. Whether a payment is consideration for a supply depends on the true character of the transaction. Consideration for a supply is something the supplier receives for making the supply. Although a non-monetary payment (and acts or forbearances) can form consideration, the character of the transaction will determine whether it forms part of the consideration received by the supplier for making the supply. [emphasis added]

Applying the legislation and ATO view to your circumstances:

We have concluded that you make one supply when you sell the real property. To make the supply you undertake a number of activities including entering into a contract of sale, entering into the Agreement and securing your interest in the arrangement and Agreement by registering a second mortgage over the real property.

Monetary consideration:

The Home Owner pays the adjusted sales price to you at settlement. This amount is generally financed by a financial institution and secured by a registered (first) mortgage. You agree the payment made by the Home Owner in relation to the adjusted sales price is monetary consideration.

Non-monetary consideration:

We refer to the paragraphs of GSTR 2001/6 extracted above to establish whether a payment in the form of non-monetary consideration has occurred when sell the apartment to the Home Owner.

You require the Home Owner to enter into the Agreement if he/she wishes to purchase the real property. We examine the activities in relation to the entering of the Agreement which you secure with a (second) registered mortgage:

● The Agreement prescribes enforceable obligations on the Home Owner, as well as the other members of the Household. The enforceable obligations include:

(i) The Home Owner and Household are required to satisfy the eligibility requirements of the Agreement.

(ii) The Home Owner is restricted on what it can do with the real property, for instance, the Home Owner is unable to lease without your permission and is unable to assign the Agreement to another person or entity.

(iii) The Agreement has a call option component.

(iv) The Home Owner is required to pay you an ‘Option Removal Fee’ (Fee) if you exercise the call option. The amount you pay to the Home Owner when you exercise your right to purchase the real property can be offset by the amount of the Fee to facilitate this requirement.

(v) The Home Owner is required to pay you the Fee if the Home Owner sells the real property or wants you to remove your registered (second) mortgage.

(vi) The Home Owner is required to pay you the Fee if certain events are triggered, such as if the Home Owner and Household no longer satisfy the eligibility requirements. Triggered events also include the Home Owner becoming bankrupt, being party to an insolvency arrangement, failing to provide you with information as part of the regular reporting, failing to immediately notify you if charged with a criminal offence or defaults on the lending which is secured under the first registered mortgage.

(vii) The Option Removal Fee is calculated based on relevant percentage (being the percent the purchase price is reduced by at settlement) multiplied by the Fair Market Value of the apartment at the time the Option Removal Fee is required to be paid.

(viii) The Home Owner does not pay you a (physical) monetary amount when entering into the Agreement.

After reviewing the above information, we conclude an economic value can be placed on the act of the Home Owner’s entry into the obligations under the agreement which is secured by your (second) mortgage. (re: paragraph 81 of GSTR 2006/1).

The Home Owner could pay you the Fee at settlement, or just after settlement, if the Home Owner did not wish you to register the (second) mortgage. The economic value of the act of the Home Owner’s entry into the obligations under the Agreement which is secured by your (second) mortgage in this case can be worked out using the Fee calculations which are described in the Agreement and would equate to the same amount the sale contract was reduced as a result of the settlement adjustment.

Additionally it is reasonable that you would need to assert an economic value on your (second) mortgage as:

● you enter into priority arrangements with the financial institution that will register its (first) mortgage which would occur prior to registration of your (second) mortgage.

● The Home Owner can grant a mortgage to a third party, but must enter into a priority agreement with you and the first mortgagee and a priority agreement would need to include values relating to the first mortgage and your second mortgage

Additionally as mentioned above, entering into the Agreement is a condition of the sale contract, with the entering into the Agreement forming part of the arrangement which moves the ownership of the real property from you to the Home Owner.

We are satisfied that an economic value of the rights provided by the purchaser under the Agreement can be worked out at the time of settlement based on what the Fee would be that day.

This economic value is characterised as non-monetary consideration and is part of the overall consideration (monetary and non-monetary) that you receive when you make a supply of an real property to the Home Owner.

Additionally, should the Proposed Model Arrangements involve two supplies, being the sale of the (1) real property and the (2) rights and obligations upon entering into the Agreement, each supply would be made for consideration (being monetary and non-monetary respectively) when the supplies are made. We consider the timing of each supply occurs when the settlement of the real property occurs as each supply is intrinsically linked with the other and cannot take place at a time other than settlement.

Conclusion:

Based on the above information, we are satisfied the payments and obligations which arise when you and the Home Owner enter in to the contractual arrangements of the sale contract, the Agreement and the (second) mortgage are sufficiently connected (nexus) to your sale of the real property.

Therefore, the consideration (under section 9-15 of the GST Act) for your supply of the real property to the Homeowner under the Arrangements will include the adjusted sales price (monetary consideration) and the act of the Home Owner’s entry into the obligations under the Agreement which is secured by your (second) mortgage (being non-monetary consideration).

Additionally, should the Proposed Model Arrangements involve two supplies, being the (1) sale of the apartment and (2) the Home owners obligations upon entering into the Agreement, each supply would be made for consideration (being monetary and non-monetary respectively) when the supplies are made. We consider the timing of each supply occurs when the settlement of the apartment occurs as each supply is intrinsically linked with the other and cannot take place at a time other than settlement.

Decision:

The consideration for a supply made by you when you sell the real property to the Home Owner which includes the Agreement is not limited to the ‘Adjusted Sales Price’.