Edited version of your written advice

Authorisation Number: 1051517258837

Date of advice: 16 May 2019

Ruling

Subject: GST and property

Question

Question 1

Did Entity A make a taxable supply, of development services to the relevant authority in completing development works pursuant to the Contract, Project Delivery Agreement and the executed Crown Lease (collectively referred to as the Transaction Documents) on the land, pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No

Question 2

Are the development works undertaken by Entity A, pursuant to the Transaction Documents, non-monetary consideration for the acquisition of the land by Entity A from the relevant authority, pursuant to section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No

Relevant facts and circumstances

The following are the facts as outlined in your request together with further facts we have ascertained. 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.

Enity A registered for GST from ddmmyyyy.

On ddmmyyyy, Entity A entered into a contract for the grant of a 99 year Crown Lease for the land in the relevant State or Territory from the relevant authority (Contract).

Under the Contract, the relevant authority agreed to grant, or procure the grant of, a 99 year Crown Lease to Entity A on Completion of the Contract on substantially the same terms as the Specimen Lease annexed to the Contract.

The purchase price stated in the contract was $xxxx (including any GST payable), with Completion of the Contract. On ddmmyyyy, the relevant authority granted a Crown Lease over the Land to Entity A. The Crown Lease was granted on substantially the same terms as the Specimen Lease annexed to the Contract.

The Contract is contingent upon the relevant authority and Entity A entering into the Project Delivery Agreement (PDA) prior to or at the same time they entered into the Contract. Entity A must comply with all of its obligations under the PDA. Further detail on the relevant clauses from the PDA is provided below.

The Annexures attached to the Contract are:

● Annexure A – Specimen Lease

● Annexure B – Project Delivery Agreement

● Annexure C – Background Documents

● Annexure D – Prescribed Conditions

● Annexure E – Deed of Unconditional Undertaking

● Annexure F – Block Details Plan

● Annexure G – Special Conditions

The Contract, Crown Lease and the PDA (including the Design Guidelines) (collectively, the Transaction Documents) include a number of mechanisms to ensure that Entity A satisfactorily completes the development within the agreed timeframe and to the agreed specifications. The relevant clauses in the Transaction Documents are outlined below.

Contract

● Under the Contract, Entity A was required to comply with the Design Guidelines and acknowledged, by execution of the Contract, having read and understood its contents.

● Clause xx is with respect to the PDA and the Security. In particular:

A. Entity A and the relevant authority entered into a PDA, with effect from the making of the Contract.

B. Entity A must comply with all of its obligations under the PDA.

C. Entity A is restricted from dealing with the land until it has complied with its obligations under the PDA.

D. Entity A may not sell the land or permit any transfer of the land to be registered until it has complied with all of its obligations under the PDA.

E. Entity A acknowledges and agrees that the relevant authority may retain and use the Security in respect of its obligations under the Contract and the PDA. With reference to the schedule in the PDA, the Security is set at xx% of the contract price (as noted in the definition of Security Amount in the PDA). This amount is agreed to be security for the performance by Entity A of its obligations under the Contract and PDA.

F. The relevant authority may register a charge or caveat over the Crown Lease, provided that the caveat does not prevent Entity A from registering a mortgage in respect of the mortgage.

G. The charge and any associated caveat must be withdrawn once Entity A has complied with all obligations under the Contract and PDA and Entity A requests the relevant authority to withdraw the caveat.

Annexure B: Project Delivery Agreement (PDA)

● The PDA is dated ddmmyyyy and, as required by the Contract, was entered into simultaneously with the Contract. The PDA includes the Design Guidelines that sets out the manner in which the development is to be constructed (Annexure A to the PDA).

● Clause B of the Background states that the Developer will, in developing the Land, comply with the Developer’s obligations set out in the PDA.

● The PDA specifies that it remains in force until the parties have complied with all of their obligations under the Agreement.

● Under clause xx, the Developer must design and construct all buildings on the land consistent with all applicable laws, the Design Guidelines and the terms and conditions contained in the Agreement.

● Clause xx of the PDA is with respect to the relevant authority endorsement of the Development Application. In particular:

A. Entity A is obliged to consult with the relevant authority and seek endorsement from the relevant authority for the Initial Development Application (DA) prior to the lodgement of the DA with the relevant authority, as well as undertaking any changes that are reasonably required to be made by the relevant authority;

B. The relevant authority will endorse the DA if it complies with the Design Guidelines, and all applicable laws and include changes reasonably required by the relevant authority; and

C. Entity A is required to submit the DA to the relevant authority in the form endorsed by the relevant authority and must not lodge a DA with the relevant authority that has not been endorsed by the relevant authority.

D. If the relevant authority requires a variation or amendment to the DA, Entity A must submit the varied or amended version of the DA to the relevant authority for endorsement prior to resubmission.

● Clause xx of the PDA outlines Entity A’s obligation in respect of any Subsequent Development Application (SDA). In particular:

A. Entity A must not lodge an SDA with the relevant authority for Development Approval until it has been endorsed by the relevant authority, provided that this clause ceases to apply upon the issue of the Compliance Certificate;

B. The relevant authority will endorse the SDA if it complies with the Design Guidelines, and all applicable laws and include changes reasonably required by the relevant authority; and

C. Entity A is required to submit the SDA to the relevant authority in the form endorsed by the relevant authority.

D. If the relevant authority requires a variation or amendment to the SDA, Entity A must submit the varied or amended version of the SDA to the relevant authority for endorsement prior to resubmission.

● Clause xx of the PDA is with respect to consultation that is required between the relevant authority and Entity A. In particular Entity A must:

A. attend an introductory meeting with the relevant authority to be briefed on the Design Guidelines and the DA;

B. attend a second meeting with the relevant authority and Entity A’s architect to present concept designs;

C. attend a third meeting with the relevant authority and Entity A’s architect to present detailed designs; and

D. attend any further meeting required by the relevant authority to discuss the designs and the DA.

● The PDA provides for the protection of the relevant authority property, such as with verges and footpaths during development.

● The PDA imposed specific completion requirements on the construction of dwellings on the Land, which mirror the requirements as set out in the Lease (see below).

● Clause xx of the PDA is with respect to the Security. In particular:

A. Entity A must provide to the relevant authority a security for the performance of all of Entity A’s obligations under the PDA. The amount of the security was set at xx% of the contract Price.

B. If Entity A breaches its obligations, the relevant authority may remedy the breach and call on the security payment for all costs incurred to remedy the breach.

C. The security will be released to Entity A following completion by Entity A of its obligations under the PDA.

D. In addition to the Security, Entity A will charge in favour of the relevant authority the whole of their interest in the Land and Crown lease as security for the performance of its obligation under the PDA and Contract of Sale.

E. the relevant authority may register a charge or caveat over the Crown Lease, provided the caveat does not prevent the registration of a mortgage by Entity A.

F. The charge and any associated caveat must be withdrawn once Entity A has complied with all obligations under the Contract and PDA and Entity A requests the relevant authority to withdraw the caveat.

● Clause xx of the PDA is with respect to Sale of the Property. In particular, clause xx prohibits Entity A from selling or assigning any interest in the Crown Lease or Land to any person before the Release Date (i.e. the date when the relevant authority releases the Security) unless certain conditions are satisfied.

● Entity A indemnifies the relevant authority from any claim, expense, loss or damage suffered by the relevant authority arising out of a failure by Entity A to duly and punctually perform its obligations under the PDA.

● The PDA contains a GST ‘gross-up’ clause, which requires a recipient of a taxable supply to pay to the supplier the amount of GST in respect of the supply (unless the supply is expressly stated to be GST inclusive). Any amounts of GST only need to be paid when a tax invoice has been issued in respect of that supply.

Design Guidelines

● The purpose of the Design Guidelines is to provide a framework for the development. The Design Guidelines must be adhered to and compliance is mandatory under the Contract.

● The Design Guidelines set out details with respect to the Planning Principles. The Planning Principles provides guidance on the following areas:

A. Streetscape

B. Building Entries

C. Site & Vehicular Access

D. Services

E. Massing

F. Street Level

G. Upper levels and Rooftop

H. Materials

I. Amenity & Sustainability

Crown Lease

The Crown Lease is a market value lease.

The key terms of the Crown Lease are:

● It commenced on ddmmyyy.

● The term is for xx years.

● Entity A is required to pay rent of $xx per annum.

● The lease provides that the land may be used for the purpose of multi-unit housing, with other uses permitted on the ground floor of the premises.

● Entity A must undertake the following:

(a) commence, within xx months from the date of commencement of the lease (or such further time approved by the relevant authority in writing), to erect an approved development on the land in accordance with plans and specifications Entity A prepared and previously submitted to the relevant authority for approval in writing

(b) complete, within xx months from the Lease commencement date (or such further time approved by the relevant authority in writing), the erection of the ‘approved development’ on the land. The development must be in accordance with plans and specifications Entity A has prepared and previously submitted to the relevant authority for approval in writing, and in accordance with all applicable laws and regulations.

(c) Associated works

commence within xx months and complete within xx months from the Lease commencement date (or such further time approved by the relevant authority in writing), and prior to the commencement of any trading or business from the premises, the design and construction of:

I. heavy duty concrete driveway in accordance with the relevant authority current version of the relevant Design Standards and constructed to the relevant authority current version of the relevant Standard Specifications’;

II. vergeworks as required by the relevant authority; and

III. any other works required by the relevant authority as a result of an audit on submitted plans for design approval including all ancillary works and fittings in accordance with the prescribed conditions for associated works and plans and specifications prepared by the Lessee and previously submitted to and approved by the relevant authority.

(The Prescribed Conditions attached as Annexure D to the Contract specify that the lease is conditional upon the lessee designing and constructing at the lessee’s cost, the associated works, which will become the assets of the relevant authority.

The lessee is required to lodge a ‘Deed of Unconditional Undertaking’ in the amount of $xx including GST prior to execution of the lease. If the associated works are not completed within the specified time period, or any defects are not remedied within the required time period, this money shall be forfeited to the relevant authority as deemed necessary for completion and rectification. The undertaking may be reduced to $xx on Practical Completion and the remainder released on Final Completion of every part of the associated works.

(d) provide and thereafter maintain certain works on the land, to an acceptable standard and in accordance with previously submitted and approved plans and specifications, namely:

i. an approved drained and sealed car parking area on the land

ii. landscaping

iii. an area for the loading and unloading of vehicles on the land

iv. facilities and access on the land for persons with a disability

(e) and also;

(i) illuminate and keep illuminated all public access areas, car parks and driveways on the land at the Lessee’s cost during the evening hours of operation

(ii) preserve all trees on the land that have been identified for retention in the development approval or to which the relevant legislation applies, unless the relevant authority consents to their removal

(iii) screen and keep screened all service areas and plant and machinery to the relevant authority’s satisfaction

(v) only erect buildings or make structural alterations to any building with the relevant authority’s written approval

For clarity, in this private ruling the above requirements at points (a) to (e), which Entity A is required to undertake within a specified time period, are referred to as ‘development works’. If the context requires, points (a) and (b) are referred to as ‘approved development’ and the other points, (c) to (e), as ‘additional site works’.

● The Crown Lease may be terminated by the relevant authority in the following circumstances:

● Any rent or other moneys payable by Entity A under the lease remain unpaid for three months after the appointed payment date.

● Entity A fails to commence an approved development within the timeframe specified in Clause xx.

● Entity A fails to complete an approved development within the timeframe specified in Clause xx.

● Associated works in accordance with Clause xx of the lease are not completed within the period specified

● After completion of the approved development, the land is not used for an approved purpose (specified in Clause xx for at least xx years.

● Entity A fails to observe or perform any other covenants contained in the Crown Lease and fails to remedy such breach within xxx months after the relevant authority serves Entity A with written notice of the breach.

● Subject to Entity A paying all money required to be paid under the provisions of the relevant legislation, Entity A shall at the expiration of the Crown Lease be entitled to a further lease of the land for such further term and at such rent and subject to such conditions as may then be provided or permitted by the relevant legislation.

The development and building approval process

Entity A has completed construction of the multi-unit housing development on the Land.

During construction, Entity A entered into contracts for the sale of completed units in the development. The contracts for sale with third parties were subject to and conditional upon Entity A completing the development in accordance with the terms of the PDA and achieving unit titling for the site.

Once Entity A completed the development (at a cost of about $xxxx) and received the certificate of compliance, Entity A applied to the relevant authority for approval of the unit title application. The relevant authority assessed and approved the sub-division of the parcel under the relevant legislation, whereupon Entity A lodged the approved Units Plan for registration with the relevant authority.

On the same day the relevant authority registered the Units Plan, the Crown Lease came to an end due to the operation of the relevant legislation. Entity A then became 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 relevant authority cancelled the original Crown Lease and issued certificates of title for each unit to Entity A.

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

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

Reasons for decision

In this ruling,

● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Question 1

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 (GSTR 2006/9) 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 agreements 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 acquired by Entity A is for xx years and is renewable at no cost. It is the most substantial interest in land that can be granted to anyone in the relevant State or Territory as the relevant entity must remain the owner of the reversion. The relevant entity can never dispose of the reversion. If the lease is not renewed and a development has been completed, then Entity A, 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 retained for the benefit of the lessee and are not provided to the relevant State or Territory.

The purchase price stated in the Contract is $xxxx (including any GST payable). Stamp Duty was paid on the basis that the consideration for the grant of the xx year lease – a market value lease - was $xxxx.

The cost of the development Entity A has already completed was about $xxxx.

As with any Crown Lease in the relevant State or Territory, there are obligations about how the land could be used for Entity A’s benefit and requirements that it had to 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 could have the Crown Lease terminated for breaching provisions of the lease does not alter that it acquired the lease for a consideration of $xxxx. It is a typical feature of a lease that it can be terminated for breaches of the lease.

Entity A’s agreement with the relevant authority that the approved development will commence within xx months and be completed within xx months is primarily concerned with the timing of the completion of the development. This requirement is intended to achieve the relevant State or Territory’s policy outcome of ensuring timely and orderly development of the area and to avoid land-banking by developers.

The special conditions annexed to the Contract are in the nature of acknowledgements by Entity A that the lease would have certain restrictions and that it was aware of these. This prevents Entity A 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 the relevant State or Territory’s 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 multi-unit 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 contained on the land.

Entity A is required to provide and maintain additional site works under Clause xx of the Crown Lease. These additional site works can only be provided on the site after Entity A is already the lessee under the Crown Lease. Entity A does not receive any further supply of anything from the relevant authority after completion of these works. These obligations are imposed under legislation on any holder of a long term lease who obtains approval to construct on the land they are leasing if they need access to a road and want planning approval.

Conclusion

Complying with the requirements of the Transaction Documents does not result in Entity A making a supply to the relevant authority. 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. The development works do not benefit the relevant authority, rather they benefit Entity A 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 relevant entity or the relevant authority.

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

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.

Under subsection 9-15(2), it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

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)

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

A payment will be consideration for a supply if the payment is ‘in connection with’, ‘in response to’ or ‘for the inducement’ of a supply. Furthermore, for the reasons given in paragraphs 69-70 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration, the Commissioner takes the view that ‘in connection with’ is a wider concept than ‘for’ and a requisite connection between consideration and property is established where ‘the receipt of the payment has a substantial relation, in a practical business sense, to that property’.

Whether a payment is ‘in connection with’ a supply is determined by considering whether there is sufficient nexus between the supply and the payment. Consideration for a supply is something the supplier receives for making the supply. It may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction.¹

For real property transactions, ‘consideration’ has the relevant nexus where it ‘moves’ the transfer of the land.

Effect of the arrangements

Entity A has entered into a Contract for the grant of a xx year Crown Lease over land valued – being a market value lease - and paid monetary consideration of $xxxx (including GST). This is consistent with the value of the land and there is no reason anyone dealing at arm’s length with the relevant authority or the relevant authority would pay additional non-monetary consideration that costs about $xxxx to provide.

On ddmmyyyy, having paid the balance of the purchase price, Entity A was granted a Crown Lease over the Land by the relevant authority. The continuation of the lease was subject to certain conditions as outlined in the Crown Lease.

The terms of the arrangement outlined in the Transaction Documents do not support the view that the relevant authority receives something in addition to the monetary consideration provided for the land. The relevant authority does not derive any economic benefit associated with the development works, being:

1. The dwellings constructed on the land:

● Only Entity A is in a position to sell dwellings built on the land. The Construction of the dwellings and the marketing thereof is for the sole benefit of Entity A.

2. Additional Site Works which Entity A was required to provide, maintain and implement under Clause xx of the Crown Lease:

● These additional site works are owned by Entity A (to the extent that real property can be owned in the relevant State or Territory) and benefit Entity A for the duration of the lease.

3. Associated Works which Entity A was required to design and construct within specified timeframes and to specified standards:

● These additional works are constructed on the relevant State or Territory’s land but are primarily for the benefit of Entity A since they provide better use and enjoyment of the development. Without a driveway crossing over the relevant entity’s land to the leased block, for example, the development would not be commercially attractive. The capacity for Entity A to sell their development would be adversely impacted.

As such, something of economic value does not pass to the relevant authority and cannot be considered to be non-monetary consideration for the supply of the Land by the relevant authority.

Further, under the relevant legislation, if a Crown Lease is not renewed and a development has been completed on the land then Entity A, as lessee, is entitled to compensation for the value of the development on the land. This requirement to pay the lessee compensation for improvements when a lease is not renewed supports a conclusion that the development works are retained for the benefit of the lessee as opposed to constituting any economic benefit that passes to the relevant entity or the relevant authority.

Finally, the terms of the arrangement outlined in the Transaction Documents, govern the procedures and requirements (legislative or otherwise) which will ensure that the land is developed in a manner consistent with the objectives of the relevant authority.

A simple way to test the proposition that nothing of economic value has been provided to the relevant entity or the relevant authority is to consider the interest of the relevant authority in the reversion of the lease. It is clear that the value of the reversion has not increased because of any building carried out on the land by Entity A. The rent remains a nominal amount of $xx per annum. The lease will continue for xx years and be automatically renewed unless the relevant authority needs the land. In the latter case if the lease is not renewed then the relevant authority has to pay compensation to the existing lessee for the value of the improvements.

The development works are not required to be performed in order for the Crown Lease to be granted to Entity A, and thus they do not ‘move’ the transfer of the land by way of lease.

Conclusion

The development works are not non-monetary consideration for the acquisition of the land by Entity A from the relevant authority.