Edited version of private advice

Authorisation Number: 1051346858261

NOTICE

This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.

This notice must not be taken to imply anything about:

·        the binding nature of the private advice issued to the applicant

·        the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 9 March 2018

Ruling

Subject: Development services

Question 1

Did Entity A make a supply of Development Services to Entity B in relation to the development of real property located at a specified address (the Site) under the agreement entered into between the parties for the Project?

Answer

Yes.

Question 2

Were the Development Services provided by Entity A to Entity B non-monetary consideration for Entity A's acquisition of the Site from Entity B?

Answer

Yes.

Relevant facts and circumstances

·        The commercial arrangement entered into between Entity B and Entity A for development of the Site involved:

i.       Entity A acquiring the land from Entity B under a Contract of Sale (the Contract); and

ii.      Entity A agreeing to develop the Site by constructing residential dwellings on the Land, in accordance with the Contract and in accordance with the terms and conditions contained in Annexure Ato the Contract, Annexure Bto the Contract, Annexure Cto the Contract and Annexure Dto the Contract.

·        Entity B was established by specified legislation. Pursuant to specified legislation, Entity B's objectives are:

i.       the provision and development of industrial, commercial, residential and other land in a range of localities to meet the social and economic needs of the State while taking account of environmental outcomes;

ii.      the identification and development, or urban renewal, of centres of population and the provision or improvement of land for those centres; and

iii.     to facilitate the development and disposal of surplus public land.

·        Pursuant to the specified legislation, Entity B has the function to be an agency through which the Crown, public authorities, local governments, regional local governments and regional subsidiaries may dispose of land.

·        Entity A is a private company that was established on a specified date and is registered for GST.

·        On a specified date, Entity B on behalf of the government, entered into the Contract with Entity A for the sale of the Site for a monetary price of $... (hereinafter referred to as the Price).

·        The Contract (including the Annexure A) includes a number of mechanisms to ensure that Entity A satisfactorily completes the development within the agreed timeframe. The relevant clauses in the Contract are outlined below.

·        Relevant Clauses in the Contract:

i.       Entity B agrees to sell and the buyer agrees to purchase the Land specified in the Schedule for an estate in fee simple for the Purchase Price and on the terms specified in the Schedule and subject to incidental conditions.

ii.      The Schedule to the Contract states that the latest date for practical completion of the development is within a specified number of months of the settlement date, as applicable to each of the lots comprising the Land.

iii.     Entity A must construct the development in accordance with concept plans submitted to Entity B in response to a Request for Proposal and also acknowledge that Entity A's proposal is subject to further review by Entity B. In addition, the final plans and specifications for the proposed development must be previously approved in writing by Entity B.

iv.    Entity A acknowledges and agrees that the development guidelines may be subject to amendment by Entity B, the local authority and any other relevant authority, and it must comply with the most current version of the guidelines when constructing the development on the Land.

v.      Entity A must meet with Entity B as required by Entity B for the purpose of satisfying Entity B that the development meets the development guidelines.

vi.    To the extent practical, Entity A is required to undertake the development over the whole of the Land.

vii.   Entity A warrants, acknowledges and agrees that the terms of the Request for Proposal apply to the Contract to the extent that they are not inconsistent with the express terms of the Contract.

viii.  Entity A acknowledges and agrees that it must include, as a green initiative, either a solar hot water system or solar photo voltaic system in each of the dwellings comprising the development.

ix.    The parties acknowledge and agree that the margin scheme will apply and be used in relation to the supply of the Land under this Contract.

x.      Clause ... provides for Entity B to grant to Entity A a non-exclusive licence in respect of the land for the purpose of constructing a dwelling on each of the lots comprising the Land in accordance with the provisions of the Contract. (Entity B had granted Entity A an 'Access Licence' over lots ... and ... prior to settlement date.)

·        Relevant clauses in Annexure A to the Contract:

i.       Clause ... states that prior to completion of the development Entity A cannot sell, assign, transfer or otherwise dispose of or lease, sub-lease, mortgage, charge, encumber or part with possession of the Land or any part of the Land without first obtaining the consent of Entity B.

ii.      Clause ...is in relation to the development of the Land. In particular:

a)     Entity A must cause practical completion of the development to be effected in accordance with the approved plans within a specified number of months from settlement date or a later period as may be approved in writing by Entity B.

b)     If required by Entity B, Entity A must submit to Entity B all proposed plans and specification for the development prior to such plans and specifications being approved by any relevant authority. Entity B may either approve or reject the plans and specifications. In the event the plans and specifications are rejected or approved conditionally, then Entity A is required to amend such plans and specifications and resubmit to Entity B for approval. Entity A is not permitted to undertake the development other than in accordance with the approved plans.

                         iii.          Clause ... is in relation to a charge over the Land. In particular:

a)     In order to secure Entity A's obligations, it is required to charge its interest in the Land in favour of Entity B and agree that Entity B may lodge an absolute caveat pursuant to such charge as equitable mortgagee over the title to the Land.

b)     The charge and any associated caveat must be withdrawn once Entity B has determined that Entity A has completed all of its obligations under the Contract.

iv.    Clause ... is in relation to Entity B's option to repurchase the Land. In particular:

a)     If at any time after settlement, Entity A fails to complete the development or otherwise fails to observe or perform any of its obligations then Entity B has the option to repurchase the Land for an unencumbered estate in fee simple.

v.      Clause ... states that Entity A indemnifies and agrees to keep fully and effectually indemnified Entity B from and against any claim, loss or liability whatsoever (whether direct or indirect and whether present or future) which Entity B may incur in connection with the Contract and in respect of any loss or expense that Entity B may incur as a consequence of any default by Entity A in respect of Entity A's obligations.

vi.    Clause ... states that to the extent that any obligation under the Contract has not been complied with on or before settlement, those obligations survive settlement and continue until complied with.

·        At settlement all the lots supplied to Entity A consisted of vacant land.

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 Paragraph 9-5(a)

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-17

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Note: In these reasons for decision, unless otherwise stated,

·        all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·        reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Summary

By developing the Site on the terms of the Contract, Entity A made a supply of Development Services for consideration to Entity B.

Detailed reasoning

Section 9-5 sets out the requirements for a taxable supply as follow:

You make a taxable supply if:

(a)   You make the supply for *consideration; and

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

(c)   The supply is *connected with the indirect tax zone; and

(d)   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.

Applying the definition of a taxable supply under section 9-5 to Entity A's circumstances, the question that remains to be determined is whether Entity A supplied something for consideration. For a supply to be for consideration there needs to be a supply, a payment and the necessary relationship between the supply and the payment.

Goods and Services Tax Ruling GSTR 2015/2, Goods and services tax: development lease arrangements with government agencies (GSTR 2015/2) expresses the Commissioner's opinion about the GST treatment of particular transactions arising in the context of development lease arrangements entered into between government agencies and private developers. Although, in your case the arrangement in question does not constitute a development lease arrangement as described in GSTR 2015/2, we consider that some of the principles outlined in the ruling apply to your situation.

As mentioned at paragraph 7 of GSTR 2015/2, the ruling does not address every possible factual scenario and does not seek to identify all possible supplies for consideration that may arise in the context of development lease arrangements. Instead, the ruling sets out some principles and examples which may be relevant to various specific situations.

Paragraphs 33-37 of GSTR 2015/2 consider the respective supplies between a developer and a government agency under an arrangement that involves the government agency transferring land to the developer. The principles in these paragraphs as they relate to supplies of development services in exchange for interests in real property are applicable to Entity A's circumstances. These paragraphs state:

33 In completing the development works on the government agency's land, in accordance with the terms of a development lease arrangement, the developer makes a supply of development services to the government agency.[9]

34. The supply of the land to the developer by the government agency is consideration for the developer's supply of development services if there is a sufficient nexus between supply of the development services and transfer of the land.

35. There is a sufficient nexus between the development services and the transfer of freehold or grant of a long-term lease if the development lease arrangement makes the supply of the land subject to or conditional on the developer completing specified development works.[10] For example, the developer only becomes entitled to the freehold or long-term lease on completion of the development or a particular stage of the development.

36. In some cases, under the terms of a development lease arrangement, the government agency grants a call option to the developer. When exercised, the call option entitles the developer to the transfer of the freehold or a long-term leasehold interest in the land. The grant of a call option by the government agency is consideration for the developer's supply of development services if the grant of the call option is subject to or conditional on the developer completing specified development works.

37. Where the circumstances set out in paragraphs 33 to 36 of this Ruling apply, supply of development services by the developer is, in turn, consideration for the supply of the land or the grant of a call option by the government agency.[11]The developer makes a taxable supply of development services and the government agency makes a taxable supply of land or a taxable supply of the grant of a call option.

In the present case, pursuant to the terms of the Contract, there is a direct link between the works (development services) required from Entity A to develop the Land and the grant of the interest in the Land by Entity B to Entity A, that is, these services were provided in addition to the monetary amount of $... in return for the Land.

This nexus is evidenced from the terms and conditions which underpins the arrangement as documented in the Contract (in conjunction with the Annexures). Of relevance, among other things, are specific clauses of Annexure A to the Contract as listed under the heading 'Relevant facts and circumstances'. These clauses in fact provide for Entity A to obtain unfettered title in the land only when it has fulfilled its obligation to complete the development in accordance with the terms of the contract. As such, we accept that one of the conditions for the land to be supplied to Entity A is that it provides the development services required to complete the development under the terms of the Contract.

Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is a sufficient nexus between the supply and the payment as consideration. The same analysis applies in determining whether goods, services or things are non-monetary consideration for a supply.

Under section 195-1, 'consideration', for a supply or acquisition, means any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition.

Section 9-15(1) provides that consideration includes:

(a)   any payment, or any 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.

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.

Paragraph 70 of GSTR 2001/6 refers to the High Court decision in Berry v. FC of T (1953) 89 CLR 653 and the meaning given to the term 'in connection with'. In that case, Kitto J commented that consideration will be in connection with property where:

'the receipt of the payment has a substantial relation, in a practical business sense, to that property...'

Paragraph 81 of GSTR 2001/6 states further:

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...

In Entity A's case, the development services have a substantial relationship, in a practical business sense to the Land (and vice versa). Furthermore, the development services also have economic value and independent identity. Consequently, the development services provided by Entity A to Entity B are considered to be additional non-monetary consideration for the supply of the land by Entity B to Entity A.

Similarly, applying the principles discussed above to the development activities required of Entity A under the arrangement, we consider that Entity A made a supply of development services for consideration to Entity B.