Edited version of private advice

Authorisation Number: 1051489210374

Date of advice: 9 December 2020

Ruling

Subject: GST and property development under a long term lease

Question 1

Did Entity A and Entity B make a taxable supply of development services pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to the Government Entity in completing development works pursuant to the Contract for Sale (Contract) and the executed Crown Lease (collectively referred to as the Transaction Documents) on Specified Block (the Land)?

Answer

No.

Question 1A

Did Entity A and B make a taxable supply of development services pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to the Government Entity in completing the relocation of the electrical infrastructure pursuant to clause X of the Special Conditions of the Sale Contract?

Answer

Yes, however it was not in connection with the acquisition of the Land and was a separate supply of works for which consideration of $XXX was paid.

Question 2

Are the development works undertaken by Entity A and B pursuant to the Transaction Documents, non-monetary consideration pursuant to section 9-15 of the GST Act for the taxable supply of the Land by the Government Entity under section 9-5 of the GST Act to Entity A and Entity B?

Answer

No.

Question 3

Is it reasonable for Entity A and B to value any non-monetary consideration payable for the acquisition of the Land by deducting the purchase price of the land from the value of the Land, as at 'Practical Completion' of the development?

Answer

Not necessary to answer.

Relevant facts and circumstances

Entity B is a company that was incorporated on ddmmyyyy and registered for GST on ddmmyyyy.

Entity A is a company that was incorporated on ddmmyyyy and registered for GST on ddmmyyyy.

In MMYYYY a Master Plan was prepared for a part of the state in which a specified block (the Land) was located.

On ddmmyyyy a Government entity entered into an Agreement for Lease with a retail operator in relation to the future development of a block of Land (the Land).

On ddmmyyyy a Government entity issued a document called the General Sales Information Document for the sale of the Land.

On ddmmyyyy entity A and B entered into an agreement called a Co-owners Agreement which set out their respective roles in the development of the land.

It also provided that following completion of the development Entity B will take the commercial component of the development and will enter into a lease with the Retail operator and others and Entity A will take the residential component of the Land and sell to third parties.

On ddmmyyyy Entity A and B entered into an agreement called the Development Agreement. This set out the interests in the project of related parties and set out the Project. The Project was defined as all activities implementing or related to the development, subdivision and partitioning of the Land and including management, development and marketing of the Residential Component, the construction and sale of Residential Units on the Residential Component, including the construction of the Commercial Component.

On ddmmyyyy a Government Entity, entered into a Contract for Sale of the Land, by way of grant of a 99-year Crown Lease, with Entity A and B.

As part of the sale contract including the annexures, Entity A and B were required to comply with

•         All government requirements

•         Construct a specified retail outlet and enter into an Agreement for Lease with the specified Retail Operator and

•         Move certain electrical infrastructure for a specified payment.

The purchase price stated in the Contract is $XXX(including any GST Payable). GST was calculated under the margin scheme (clause 25). Completion of the contract occurred on ddmmyyyy at which time a 99-year Crown Lease over the land was granted to Entity A and B.

There was no Project Delivery Agreement (PDA) for this arrangement.

On ddmmyyyy a document called Prescribed Conditions for Associated Works (on the land) was created and this was attached to the sale contract as an annexure. It provided for a number of works to be completed on the Land and its surrounds. A security deposit was required to be paid and was to be returned on successful completion of the Associated Works.

On the day the contract was completed with Entity A and B, the Crown lease for the Land was executed.

The Crown Lease is a market value lease.

The Key terms of the Crown Lease are:

•         The term was for 99 years

•         The rent was X cents per annum

•         It included a purpose clause and described some of the works to be completed.

•         It set out the basis for termination of the lease and

•         That the lease could be renewed following expiry of the 99 years and

•         The details of what would occur if the lease was not renewed and a development has been completed on the land.

Stamp Duty was paid and calculated on a value of $XXX which included the security amount of $XXX for the Cash Security Deposit

On ddmmyyyy an application to vary the Crown Lease was lodged by Entity C, which along with Entity D, had 50% control each of Entity A and B.

The purpose of the variation was to enable the development, subdivision and partitioning of the land.

The development and building approval process

Entity A is the nominated developer.

Construction of the development commenced on ddmmyyyy. The Associated Works were completed in mmyyyy and Practical Completion of the building occurred in mmyyyy. The certified costs of the development works to mmyyyy were $XXX (ex GST).

The Crown Lease over the Residential component was registered on ddmmyyyy in the names of Entity A and Entity B.

The Crown Lease over the Commercial component was registered on ddmmyyyy in the names of Entity A and Entity B.

Entity A and B applied to the relevant Government Authority on ddmmyyyy for the partitioning of their respective components.

Transfer of the Crown Leases will be effected through a partition such that Entity A will become the sole registered proprietor of the Residential component and Entity B becomes the sole registered proprietor of the Commercial component.

Once approval has been received in respect of the Units Plan application for its residential component, Entity A will lodge the approved Units Plan for registration with the Land Titles Office. On the same day as the Registrar-General registers the Units Plan, the Crown Lease for the residential component will come to an end due to the operation of section 33 of the Unit Titles Act 2001. Entity A will become the holder of an estate in leasehold in each unit for a term ending on the same day as the original Crown Lease (referred to as a Unit Title Lease). The Registrar-General will cancel the original Crown Lease and issue certificates of title for each unit (under the relevant Act) to Entity A.

Application for the certificate of compliance was lodged on ddmmyyyy and issued on ddmmyyyy.

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 9-10 and

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

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

Who is the supplier?

Entity A and B entered into an arrangement which is governed by a Co-owners Agreement and Development Agreement and jointly acquired the property as Co-owners, each holding 50% of the Land. On completion of the project, Entity A and B will partition the property and each will then own a 100% interest in the newly created portions of the property.

We consider, that as a result of the Agreement, a non-entity joint venture has been established for GST purposes.

However, this does not result in a separate entity being created for GST purposes. The individual companies will continue to be liable for their own GST obligations under the arrangement including when the property is partitioned. Further, Entity A will provide construction services to Entity B.

Taxable Supply

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

•         you make the supply for consideration

•         the supply is made in the course or furtherance of on enterprise that you carry on

•         the supply is connected with the indirect tax zone (Australia) and

•         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.

Supply

Section 9-10 defines a supply very broadly, as being any form of supply whatsoever and includes:

•         A supply of goods

•         A supply of services

•         An entry into an obligation to do anything.

Characterising the supply

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies examines the meaning of supply for the purposes of the GST Act.

Paragraph 22 of GSTR 2006/9 outlines the ten propositions which may be relevant to characterising and analysing supplies. The relevant propositions include:

•         Proposition 5: An entity will make a supply if it provides something to another entity.

•         Proposition 6: 'Supply' usually, but not necessarily, requires something to be passed from one entity to another.

•         Proposition 9: Creation of expectations alone does not establish a supply.

Proposition 5 provides that an entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient). This is consistent with the ordinary meaning of 'supply', being to furnish or provide.

When analysing an arrangement to determine the GST consequences, it is necessary to examine the terms of the transaction documents between the parties and the facts and circumstances in which the arrangement is carried out to identify what is being supplied.

Lease transactions involve the granting of various rights and entry into various obligations by the parties to the transaction. However, not every obligation that arises under a lease is a separate supply made for consideration. Some obligations are merely part of the terms and conditions of the lease. For example, the terms of a lease may include an obligation by the tenant to repair any damage done and return the premises to their condition as at the commencement of the lease.

Paragraph 21 of Goods and Services Tax Ruling GSTR 2003/16 Goods and services tax: inducements to enter into a lease of commercial premises states:

21. However, where the tenant agrees to carry out work on the premises in addition to the normal obligations of a tenant, there may be a separate supply made by the landlord. If so, that consideration (that is, the work carried out by the tenant) may be for the separate supply of the entry, or agreement to enter, into the lease by the landlord. It is also a separate supply made by the tenant in these circumstances, rather than merely a condition of the lease.

In the relevant state or territory, it is a key obligation of Crown lessees to develop the land in accordance with the building and development covenant which requires that lessees complete a building on the land within a specified time period from commencement of the lease.

That is, in the relevant state or territory it is a normal obligation of a lessee under a Crown Lease to carry out development works within a specified timeframe. For this reason, paragraph 21 of GSTR 2003/16 is not applicable to development requirements in Crown Leases granted to lessees in the relevant state or territory.

In AP Group Limited v Commissioner of Taxation (AP Group) the Full Federal Court confirmed the earlier Tribunal decision that the car dealer's agreement to perform obligations imposed by dealer agreements was not a supply to the car manufacturer, The Tribunal recognised there is an 'air of unreality' if every possible obligation is considered to be a supply. The Tribunal considered the overall business relationships and contractual arrangements between the dealer and the manufacturer and concluded that the acceptance of the obligations or the making of the promises were not supplies but were part of the foundation underpinning the relationships and the background to the bargain the parties had made. That is, not every promise or obligation to do something under a contract is a supply. Some things are just the terms of the arrangement on which the respective parties have reached agreement.

Effect of the arrangements

The Crown Lease Entity A and B acquired, is for 99-years and is renewable at no cost. It is the most extensive interest in land that can be held in the relevant state or territory with the Commonwealth holding the reversion. The Commonwealth can never dispose of the reversion. If the lease is not renewed and a development has been completed then Entity A and B, or the lessee at the time, is entitled to compensation for the development. This requirement to pay the lessee compensation for improvements when a lease is not renewed supports a conclusion that the development works are performed for the benefit of the lessee and are not provided to the relevant state or territory.

The purchase price for the Land stated in the Contract is $XXX (including any GST payable). Stamp Duty was paid on the basis that the consideration for the grant of the 99 year lease (being market value lease) was $XXX plus the additional amount of $X.00 as required under section 21 of the Stamp Duty Act.

The certified costs of the development as at mmyyyy are $XXX (ex GST).

As with any Crown Lease in the relevant state or territory, there are obligations about how the land could be used for the benefit of Entity A and B and requirements that it must be developed within a specified time period. There is nothing unusual in a leasehold estate having limitations about how it will be used and containing obligations to use it. A leasehold estate is a lesser interest in land than a freehold estate and those restrictions would be reflected in the value and price paid for it.

Further, the fact that Entity A and B could have the Crown Lease terminated for breaching provisions of the lease does not alter that it acquired the lease of the Land for 99 years for a consideration of $XXX. It is a typical feature of a lease that it can be terminated for breaches of the lease.

Entity A and B's agreement with the Government entity that the approved development would be completed within X months is primarily concerned with the timing of the completion of the development. It is designed to encourage compliance with the relevant state or territory Government's broader land development policy of ensuring timely and orderly development of the area and to operate together as a deterrent to land speculation in the relevant state or territory.

The special conditions annexed to the Contract are in the nature of acknowledgements by Entity A and B that the lease would have certain restrictions and that it was aware of these. This prevents Entity A and B from claiming damages for having received something less than complete unfettered rights to use the leased land.

However, the restrictions are in the nature of planning and development conditions that would be expected to be imposed by a local government when approving a development. The existence of those restrictions would have been reflected in the value of the Crown Lease in the same way planning restrictions impact the value of other land.

Accordingly, the requirement to build dwellings within a particular time period is properly characterised as a condition of the Crown Lease, designed to achieve a Government policy outcome rather than the provision to the relevant state or territory of something which has measurable economic value.

The relevant state or territory does not derive any economic benefit from the development being built on the land other than having the relevant land developed in a manner consistent with policy and design guidelines. Only Entity A is able to sell dwellings constructed on the land and only Entity B is able to lease the commercial component.

Entity A and B are required to provide additional site works under Clause X of the Crown Lease. These additional site works can only be provided on the site after Entity A and B are already the lessee under the Crown Lease. Entity A and B do not receive any further supply of anything from the Government Entity after completion of these works.

Conclusion

Complying with the requirements of the Transaction Documents does not result in Entity A and B making a supply to the Government Entity. The requirements are simply terms of the arrangement to ensure that the development of the land is managed according to legislation and the objectives of the relevant state or territory government. The development works do not benefit the Government Entity, rather they benefit Entity A and B for the duration of the Crown Lease. Consequently, apart from the monetary consideration paid under the Contract in this arrangement, nothing of economic value passes to the Government Entity.

In the absence of a supply from Entity A and B to the Government Entity under the arrangement, there is no taxable supply of development works under section 9-5.

Other matters

Construction works by Entity A and B

Under the Agreements, Entity A will construct the commercial component of the property development in return for a payment from Entity B. The supply of construction services by Entity A is a supply to Entity B and is not a supply of development services to the Government Entity in return for the supply of the land. Likewise, the payment by Entity B to Entity A is not a payment for the supply of the land by the Government Entity but a payment for construction services supplied by Entity A.

Cash Security deposit

The purchase price stated in the contract was $XXX including any GST payable. However, stamp duty was paid on the basis that the consideration for the grant of the 99-year lease (being a market value lease) was $XXX.

The difference between the purchase price and stamp duty figure relates to an amount of $X.00 and was referred to as a cash security deposit. This amount was paid at settlement as an estimate of the value of the works to be undertaken pursuant to the Prescribed Conditions for Associated Works. The vendor included this information in the declaration regarding stamp duty as required under the Stamp Duty Act.

The Commissioner's view on deposits paid to secure the performance of an obligation are set out in Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation. (GSTR 2006/2). Clauses 7 to 10 provides the following information:

7. For GST purposes, a payment is treated as consideration¹ for a supply if it is in connection with, in response to, or for the inducement of the supply. If the payment is consideration for a taxable supply, receipt of the consideration in a particular tax period requires attribution of the GST payable to that tax period.²

8. The payment of a deposit may constitute part of the consideration for a supply. Under the basic rules of the GST Act, the GST payable on a taxable supply is subject to the attribution provisions contained in section 29-5.

9. However, when an amount is paid as a security deposit, the special rules set out in Division 99 apply.³

10. The Explanatory Memorandum⁴ (EM) states:

If you make a security deposit, the intention is usually that it will be refunded to you when you meet the obligations to which the deposit relates. The deposit may be consideration for a taxable supply. However, it would be pointless for the supplier to charge GST on the deposit if the deposit is to be refunded, in which case the GST would have to be refunded to the supplier.

However, some security deposits later become incorporated in the consideration for a taxable supply. At some point the deposit ceases to be held as a security deposit and is offset against the remaining consideration that is payable. GST should be charged on such deposits if they become part of the consideration for the taxable supply.

Also, if a security deposit made in relation to a taxable supply is forfeited, GST should be payable on the deposit.

For these reasons, Division 99 provides special rules in relation to security deposits.

If a security deposit is made, it is treated as not being consideration for a supply (and hence not subject to GST) unless the deposit is forfeited or is applied towards the consideration for the supply...

In your case, we consider that the Cash Security Deposit is a security deposit for the purposes of Division 99. Where it is released on final completion of the Prescribed Conditions for Associated Work, it will not be considered to be additional consideration for the acquisition of the land by you. Where it is forfeited or applied to the purchase price of the land, then it will be considered to be consideration for the supply of the land. In your case, you have advised that it will be released on completion of the 'Associated Works'.

Agreement to lease

Under clause X of the Contract, when buying the Land, Entity A and B are required to produce to the Government Entity, on or before Completion, an executed and binding agreement for lease between the Retail Operator and Entity A and B in the form annexed to the Contract.

Your tax agent has argued that because Entity A and B are required to enter into a lease with the Retail Operator and complete specified Lessor works associated with the lease, then there is a supply to the Government Entity of those works

However clause X of the Agreement for Lease between the Government Entity and the Retail Operator provides that the Government Entity is not obligated to undertake any Lessor Works, lease the Premises to the Retail Operator or otherwise comply with any obligations or rights of the Retail Operator under the Agreement while the Government Entity is the Lessor. That is, the Government Entity has no obligations under the Agreement for Lease.

It follows, therefore, that Entity A and B do not assume any obligations of the Government Entity pursuant to the Agreement for Lease between them and the Retail Operator.

The subsequent Agreement for Lease entered into between Entity A and B (Lessor) and the Retail Operator (Lessee) was executed on the same date the Contract was completed. The Government Entity is not a party to this agreement and the arrangements are those agreed between Entity A and B and the Retail Operator.

Clause X states that the Lessor is required to pay liquidated damages to the Lessee if the works are not constructed by the agreed date. The Lessee then has the obligation to fit out the constructed Premises within an agreed timeframe.

Consequently, the building works for the commercial part of the development, which is to be partitioned on completion of the building works, is separate to the supply of the Land from the Government entity to Entity A and B. That is, the Lessor works, are not a supply to the Government Entity.

The requirement for Entity A and B to produce to the Government Entity, on or before completion of the Contract, an executed and binding Agreement for Lease between them and the Retail Operator is a condition of the Contract rather than a separate supply.

Entity A and B's obligation to enter into a lease with the Retail Operator at the date of the Contract for the land is not non-monetary consideration for the acquisition of the land. Entity A and B undertake construction of commercial dwellings on the land post acquisition of the Crown lease. These building works benefit the developer and not the Government Entity and they are not a supply to the Government Entity.

Conclusion

In the absence of a supply from Entity A and B to the Government Entity under the arrangement, there is no taxable supply of development services under section 9-5.

Question 1A Electrical Infrastructure works (the Works)

The Government Entity is obliged to pay Entity A and B up to $XXX inclusive of GST for the Works which may be required under clause X of the special conditions. These Works are considered to be a separate supply for monetary consideration. That is, the arrangement to perform the Works for the monetary payment is considered a separate transaction to the supply of the Land and must be accounted for by both parties separately to the acquisition of the Land.

Question 2

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

(a) any payment, or any act or forbearance, in connection with a supply of anything

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

Consideration, for a supply or acquisition, means any consideration in connection with the supply or acquisition. Consideration for a supply is something the supplier receives for making the supply. Non-monetary consideration, such as the provision of works, can constitute consideration for GST purposes.

The issue in these circumstances, is whether the building works and the associated site works are for or 'in connection with' the supply of the Crown lease by the Government Entity. This is determined by considering whether there is sufficient nexus between the supply and the payment.

However, a supply needs to be established before a question of nexus becomes relevant. There is no need to consider if the requisite nexus exists if there is no supply of works made by the developer to the Government Entity.

As set out in the response to Question 1, there is not a supply of development works by Entity A and B to the Government Entity in return for the supply of the land and therefore the development works undertaken by Entity A and B are not non-monetary consideration for the taxable supply of the land by the Government Entity.