Edited version of your written advice

Authorisation Number: 1051476201172

Date of advice: 14 February 2019

Ruling

Subject: GST and entitlement to input tax credits for acquisitions

Question 1

Do you (as a representative member of a GST Group) and other members of the GST Group make creditable acquisitions pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you acquire development services and other acquisitions relating to the Project?

Answer

Yes, based on the facts and assumption provided, the acquisitions of development services and other acquisitions relating to the Project (other than those that are not taxable supplies to you or members of the GST Group) will satisfy the requirements of a creditable acquisition pursuant to section 11-5 of the GST Act.

Question 2

If the answer to the above question is ‘Yes’ – are you entitled to an amount of input tax credits (ITCs) pursuant to section 11-25 of the GST Act equal to the goods and services tax (GST) payable on the supply of development services and other Project related creditable acquisitions supplied by third party providers to you?

Answer

Yes, based on the facts and assumption provided, you will be entitled to ITCs for the creditable acquisitions of development services and other Project related acquisitions made. You will be entitled to an amount of ITCs under section 11-25 of the GST Act equal to the GST payable on the taxable supply of the development services and the taxable supply of other Project related acquisitions supplied by other third party providers.

This ruling applies for the following periods:

February 2019 to February 2023

Relevant facts and circumstances

You are registered for GST.

You are registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and are endorsed to access GST concessions.

Your enterprise involves providing accommodation in housing facilities to tenants.

You plan to develop new housing facilities which will comprise residential premises (Project).

Following completion of the construction of the housing facilities, you will make the constructed accommodation available to eligible tenants. You will be paid rent by eligible tenants for occupying the housing. You intend to supply accommodation in the housing facilities as GST-free supplies under section 38-250 of the GST Act by supplying the accommodation at less than 75% of the GST inclusive market value of the supply of accommodation.

To deliver and fund the Project, you have engaged an unrelated project facilitator who will assist for a fee with:

● identifying a developer,

● arranging for the acquisition of the underlying land,

● arranging the funding for the Project

● managing the development of the housing facilities throughout the development phase.

The purpose of you undertaking the Project is to allow for the financing, development and ultimate delivery of completed housing by you.

The Project structure will involve forming a GST Group with transactions occurring between members of the GST Group and various other entities involved in the Project. The key steps followed and the various payments made by entities are set out below:

1. Acquiring and accessing the Project Land

● Land Trust is an existing unit trust the units in which are owned by the developer being an entity unrelated to you and unrelated to the project facilitator and registered for GST.

● Land Trust has an option (Land Option) to acquire the Project Land from an existing landowner (original landowner), another unrelated party by exercising the ‘Land Option’.

● The developer has agreed to sell the units in Land Trust it currently holds to Hold Trust.

● You are the legal and beneficial owner of 100% of the units in a Hold Trust. Hold Trust will purchase 100% of the units in Land Trust and will become the 100% legal and beneficial owner of the units before Land Trust exercises the Land Option to purchase the Project Land.

● You, Hold Trust and Land Trust will elect to form a GST group (GST Group) once you hold 100% of the legal and beneficial interests in these entities. You will be the representative member of the GST Group. You and the other members of the GST Group will be registered for GST. The GST Group will form prior to the Land Option being exercised by Land Trust.

● After exercise of the Land Option, Land Trust will own the Project Land and will grant a licence over the Project Land to you and also enter into an ‘Agreement to Lease’. This will enable you to access the Project Land to allow the construction works to be undertaken by the Developer and allow you to lease the land from Land Trust for the term of the Project.

2. Developing the Project Land

● Having access to the land from Land Trust, you will enter into a Development Agreement with the developer to enable the developer to carry out the Works in constructing the housing facilities on the Project Land.

● You will pay the Development Fee to the developer on completion of the construction as consideration for carrying out the Works (development services).

● You will enter into an Agreement to Lease with Land Trust, under which Land Trust will grant you sufficient rights of access to the Project Land to enable you to grant the developer the necessary access to enable the developer to carry out the Works. You will then lease the Project Land from Land Trust on completion of the Works.

3. Funding the Project

● Land Trust will obtain funding from Finance. Finance will obtain these funds from external financiers that have been arranged by the project facilitator. Land Trust will be required to pay Finance interest, principal and associated financing fees.

● Finance will not be a member of the GST Group and will borrow the underlying funds from third party financiers. Finance will be required to pay interest, principal and associated financing fees to third party financiers and the project facilitator.

● Land Trust will apply the funds borrowed from Finance to pay you a Payment which will provide you with the funding necessary to pay the developer for the development services and other Project related costs.

● In consideration for the Payment, you will agree to pay an annuity (annuity payment) to Land Trust to allow Land Trust to repay the loan it has from Finance and ultimately will allow Finance to repay the third party financiers. The annuity payment will provide Land Trust with a calculated income stream over the term of the Project.

Key payments under the Project and reason for these payments

● Development Fee - This is a fee payable by you to the developer to develop the Project Land in accordance with the Development Agreement. This allows you to have the housing facilities constructed.

● Payment - This is the amount paid by Land Trust to you to ensure you have funds to pay the developer to construct the housing facilities and to pay other Project related costs.

● Annuity Payment - You will be required to pay Land Trust an annuity payment on a quarterly basis as consideration for Land Trust paying you the Payment.

● Lease Rent - Land Trust will receive a nominal lease rental for leasing the Project Land to you to provide you with rights over the Project Land so you can access the Project Land for construction of the housing facilities.

● Tenant Rent – This is rent paid to you by the ultimate eligible tenants who occupy the housing facilities.

● Various Financing Fees – Fees payable include:

● establishment and commitment fees that will be payable by Land Trust and Finance.

● a financial agency fee that will be payable by Land Trust to the project facilitator at financial close as consideration for the project facilitator acting as intermediary for and on behalf of the Land Trust in arranging the Loan.

● a success fee that will be payable by Land Trust to the project facilitator for arranging the Project.

● Management Service (MS) Fee – This is a fee payable by Land Trust to Hold Trust for managing the underlying Project Land (management services). There is also a fee paid by Hold Trust to Management Services for services provided by Management Services to Hold Trust (which is in essence on supplied to Land Trust). Management Services is a wholly owned subsidiary of the project facilitator.

As the representative member of the GST Group you will lodge a group Business Activity Statement (BAS) on behalf of the GST Group. In accordance with the Division 48 of the GST Act, transactions between intra-group members while part of the single GST Group will be largely disregarded including:

● the lease between Land Trust and you

● the Payment and the annuity payments, and

● fees paid between Land Trust and Hold Trust.

Finance will not be part of the GST Group. The dealings between the GST Group and Finance will be reviewed and characterised separately. Finance will only make input taxed financial supplies and will exceed the financial acquisitions threshold (FAT). Finance will lodge its own BAS.

Assumptions

For the purposes of this ruling the following assumptions have been made:

● The supply of accommodation in the housing facilities the subject of this ruling for which rent will be paid to you by eligible tenants will satisfy the requirements of subsection 38-250(1) of the GST Act and as such will be GST-free.

● You will not exceed the FAT in respect of acquisitions.

● The GST Group will be formed prior to the option to purchase the land and the entry into various funding agreements.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Section 11-25

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-250(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 48-40

A New Tax System (Goods and Services Tax) Act 1999 Section 48-45

Reasons for decision

Question 1 Creditable acquisition

Under section 11-20 of the GST Act you are entitled to ITCs for any creditable acquisitions that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

● you acquire anything solely or partly for a creditable purpose

● the supply of the thing to you is a taxable supply

● you provide or are liable to provide consideration for the supply, and

● are registered or required to be registered for GST.

Under section 11-20 of the GST Act the entity making a creditable acquisition is the entity entitled to ITCs. An exception to this, is the representative member of the GST Group (in this case you) who has the entitlement to an ITC that is attributable to a tax period in which the acquiring entity is a member of the group, and not the acquiring entity (subsection 48-45(1) of the GST Act).

Is there an acquisition?

For there to be a ‘creditable acquisition’ there must first be an ‘acquisition’. The term ‘acquisition’ is defined in subsection 11-10(1) of the GST Act as being ‘any form of acquisition whatsoever’ and includes under subsection 11-10(2) of the GST Act:

● an acquisition of goods

● an acquisition of services

● a receipt of advice or information

● an acceptance of a grant, assignment or surrender of real property

● an acceptance of a grant, transfer, assignment or surrender of any right

● an acquisition of something the supply of which is a financial supply

● an acquisition of a right to require another person to do anything, to refrain from an act or to tolerate an act or situation.

With regard to the specific facts of this arrangement you and other members of the GST Group will acquire any number of ‘things’ that meet the statutory definition of an acquisition including:

● an acquisition of development services from the developer,

● an acquisition of the Land Option and the Project Land on exercise of the Land Option,

● an acquisition of the units in Land Trust,

● an acquisition of financial services (borrowings and establishment services) from Finance,

● an acquisition of various financing services from the project facilitator including financial agency services.

● an acquisition of management services from Management Services. (Collectively referred to as development services and other Project related acquisitions).

Are the acquisitions acquired solely or partly for a creditable purpose?

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

Are the acquisitions acquired in carrying on an enterprise?

To determine whether an acquisition is made in carrying on an enterprise, it is first necessary to ascertain whether an entity is carrying on an enterprise. Whilst the various project entities will form a GST Group, it is necessary to assess each entity individually to determine if it is carrying on an enterprise.

Pursuant to section 9-20 of the GST Act, an enterprise includes:

‘… an activity or series of activities done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property; …’

Relevantly for the members of the GST Group:

● you – will be carrying on an enterprise pursuant to section 9-20(a) and (c) of the GST Act as its activities of leasing accommodation to tenants will be carried on in the form of a business.

● Land Trust – will be carrying on an enterprise pursuant to section 9-20(c) of the GST Act in that it leases the property to you.

● Hold Trust 1, 2 and 3 – as holding entities each of these trusts needs to determine whether each is:

● merely a holding trust that holds units in Land Trust and/or derives income based on its unit holdings – see paragraph 191 and192 of Miscellaneous Taxation Ruling MT 2006/1 (i.e. a passive holding company is not considered to be carrying on an enterprise), or

● actively involved in the management of Land Trust, be it through providing loans, assets or management services – see paragraph 200 of MT 2006/1 where certain activities (indicators) are sufficient to be considered to be carrying on an enterprise.

Pursuant to the Management Services Agreement provided, each of the Hold Trusts are being engaged by Land Trust to provide the Management Services listed in that agreement. Such activities should be sufficient to conclude that each of the Hold Trusts could be carrying on an enterprise. However, this is ultimately a question of fact that will need to be monitored by each of the Hold Trusts (independently of the other Hold Trusts, and the broader GST Group) throughout the period of the Project.

On the basis that the proposed members of the GST Group satisfy the requirement to be ‘carrying on an enterprise’, it is necessary to determine whether something is acquired in carrying on an enterprise. To be acquired in carrying on an enterprise, there must be a connection or link between the thing acquired and the enterprise. Goods and Services Tax Ruling 2008/1 (GSTR 2008/1) explains at paragraphs 69 and 70 (replicated below):

‘69. The Commissioner considers that in the GST context it is necessary to make an objective assessment as to whether there is a connection between the thing acquired and the enterprise, based on all the facts and circumstances. Although the subjective purpose of the entity making the acquisition is relevant, it is not determinative.

70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However, some factors that would suggest that an acquisition is made in carrying on an enterprise include that:

● is acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise;

● the thing acquired is used by the enterprise in making supplies;

● the acquisition secures a real benefit or advantage for the commencement, continuance or termination of the enterprise;

● the acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise;

● the acquisition does not meet the personal needs of individuals such as partners or directors;

● the acquisition helps to protect or preserve the enterprise entity, structure or organisation; and

● the acquisition made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise.’

On the facts provided, the acquisition of development services and other Project related acquisitions will be acquired in the course of the enterprise carried on by the various members of the GST Group. Broadly speaking, the acquisitions made by the various members of the GST Group are directed towards fulfilling their respective parts of the obligations that will allow you to make the supplies to tenants.

Do the acquisitions relate to making supplies that would be of a private or domestic nature?

Having established that the acquisition of the development services and other Project related acquisitions will be made in carrying on the GST Group enterprise, the next consideration is whether subsection 11-15(2) of the GST Act will preclude the acquisitions in question from being for a creditable purpose to the extent that:

● the acquisition relates to making supplies that would be input taxed or

● the acquisition is of a private or domestic nature.

As noted above, the acquisitions are directed towards ultimately allowing you to make supplies to tenants. On this basis, the acquisitions will not be of a private or domestic nature.

Do the acquisitions relate to supplies that would be input taxed?

Notwithstanding the above conclusion that the various acquisitions are being made in the course of an enterprise, an acquisition will not be for a creditable purpose if it relates to making a supply that would be input taxed (paragraph 11-15(2)(a) of the GST Act).

When determining whether an acquisition has been made for a creditable purpose, subsection 48-45(2) of the GST Act requires you to consider the GST group as if it were a single entity.

Relevantly input taxed supplies include:

● the supply of residential rental – section 40-35 of the GST Act, and

● the financial supplies – section 40-5 of the GST Act (and associated regulations).

Subsection 40-35(1) of the GST Act provides that the supply of premises by way of lease, hire or licence is input taxed if:

● the supply is residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises) or

● the supply is of commercial accommodation and Division 87 of the GST Act would apply to the supply but for the choice made by the supplier under section 87-25 of the GST Act.

You will supply residential premises by way of lease, hire or licence the consideration for which will be the rent paid to you by the tenants occupying the housing. Prima facie, those supplies of accommodation are input taxed supplies in accordance with subsection 40-35(1) of the GST Act.

Are supplies of accommodation in the housing GST-free?

Section 38-250 of the GST Act, provides that a supply of accommodation by an endorsed charity will be GST-free where:

● the consideration for the supply of the accommodation:

○ is less than 75% of the GST inclusive market value of the supply (subparagraph 38-250(1)(b)(i) of the GST Act), or

○ is less than 75% of the cost to the supplier of providing the accommodation (subparagraph 38-250(2)(b)(i) of the GST Act).

You are an ACNC registered charity and are endorsed to access GST concessions including those under section 38-250 of the GST Act.

Pursuant to the assumptions that the requirements of subsection 38-250(1) of the GST Act will be satisfied in that the consideration (rental received) for the supply of the accommodation in the housing facilities will be less than 75% of the GST inclusive market value of the supply, the supply of the accommodation in the housing facilities under the Project will be a GST-free supply.

Subdivision 9-30(3) of the GST Act provides that to the extent that a supply would be both GST-free and input taxed, the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed. As there is no choice for the supply of the housing to eligible tenants to be input taxed, the supply of accommodation in housing will be GST-free.

Are other Project related acquisitions made in relation to input taxed supplies?

In addition to the supply of accommodation in housing to tenants that will be made by you under the Project, there are a number of financial supplies being made by the members of the GST Group. Specifically, the members of the GST Group will make the following financial supplies, which will prima facie be input taxed:

● the acquisition-supply of the units in land Trust, and

● the acquisition-supply of the loan from Finance.

Whilst prima facie acquisitions that relate to making these financial supplies would not be creditable acquisitions, you have advised that the GST Group will not exceed the FAT. As such, pursuant to the exceptions in subsection 11-15(4) of the GST Act, acquisitions made by members of the GST Group, whilst they are a member of the GST Group, will be creditable in that the acquisitions will not be treated as relating to making supplies that would be input taxed.

Those acquisitions relating to making a financial supply consisting of a borrowing where the borrowing relates to making supplies that are not input taxed will also not be treated as relating to making supplies that would be input taxed under subsection 11-15(5) of the GST Act and as such will be solely for a creditable purpose.

We note that each of the entities that form the GST Group will need to assess their compliance with the FAT on an individual basis for any periods prior to that entity joining the GST Group.

Is the thing acquired a taxable supply to you?

An essential requirement for a creditable acquisition is that the supply of the thing (in this case the development services and other Project related acquisition) to you is a taxable supply. Other than supplies of units in the Trust and establishment and commitment services, other supplies made by suppliers to entities in the GST Group will satisfy the requirements of taxable supplies under section 9-5 of the GST Act made to members of the GST Group. As such, this ruling only applies to those acquisitions (development services and other Project related acquisitions) made by a member of the GST Group where the supplier’s supply of the thing acquired is a taxable supply.

Will you provide or be liable to provide consideration for the supply?

The term ‘consideration’ is defined in section 9-15 of the GST Act to include:

● any payment, or any act or forbearance, in connection with a supply of anything, and

● any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

As provided for in the Development Agreement, you are liable to provide a payment to the Developer as consideration for the Developer fulfilling its obligations and supplying the development services. Therefore, the payment of the Development Fee to the Developer by you will be a payment in connection with or in response to the supply of the development services and you will provide or be liable to provide consideration for the supply.

Similarly, you or other members of the GST Group will provide or be liable to provide consideration for the supplies of other Project supplies. For example, as provided for in the Management Services Agreement, group members will be liable to make a payment of the MS fee to Services in connection with and for the supply of management services.

On that basis, the requirement for a creditable acquisition that you will provide or be liable to provide consideration for the supply of the development services and other Project related supplies will be satisfied.

Are you registered or required to be registered for GST?

On the facts and assumptions provided, you are registered for GST and are the representative member of the GST Group. Each member of the GST Group will also be registered for GST. Accordingly the requirement of a creditable acquisition that you are registered or required to be registered for GST will be satisfied.

Additional comments

You will need to monitor the use of the property in accordance with the adjustment periods set out in Division 129 of the GST Act. You may be required to make an adjustment for a change in use where you claim full ITCs on acquisitions but the actual use of the property is different to the intended use, including where one of the following applies:

● you received consideration equal to or in excess of 75% of the GST inclusive market value for the residential accommodation supplied

● there is a change in GST group membership, or

● there is a sale of the underlying property.

Conclusion

On the facts and assumption provided, the acquisition of the development services and other Project related acquisitions that are taxable supplies to you will satisfy all the requirements for a creditable acquisition under section 11-5 of the GST Act and as such will give rise to an entitlement to ITCs under section 11-20 of the GST Act.

As representative member of the GST Group, you will be entitled to the ITCs for the creditable acquisitions made.

Question 2

Amount of ITCs

Question 1 concluded that the acquisitions listed will be creditable acquisitions, pursuant to section 11-5 of the GST Act and will give rise to an entitlement to ITCs.

Section 11-25 of the GST Act provides that the amount of the ITC for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of ITCs is reduced if the acquisition is only partly creditable.

Subsection 11-30(1) of the GST Act provides that an acquisition you make is partly creditable if it is a creditable acquisition to which one or both of the following apply:

● you make the acquisition only partly for a creditable purpose

● you provide or are liable to provide only part of the consideration for the acquisition.

Based on the facts and assumptions provided, you (as representative member of the GST Group) are entitled to ITCs equal to the GST payable on the supply of the things acquired.

The consequences of the GST grouping include:

● you will be entitled to claim ITCs for creditable acquisitions made by all members of the GST group – subsection 48-45(1) of the GST Act;

● transactions between members of the GST Group will effectively be ignored for GST purposes – subsection 48-40(2) of the GST Act; and

● in determining whether an acquisition is a creditable acquisition, the GST group is treated as a single entity – subsection 48-45(2) of the GST Act.

Conclusion

For the reasons stated in Question 1, you are entitled to claim an ITC equal to the GST payable on creditable acquisitions (development services and other Project related acquisitions) relating to the Project.