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Edited version of private advice
Authorisation Number: 1051558188063
Date of advice: 9 September 2019
Ruling
Subject: GST and long term leases
Issue 1
Question 1
Will Entity A and Entity B (Taxpayers 1 and 2) make a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) of development services to the relevant authority in respect of the works they undertake on Block A under the arrangement (the works)?
Answer
1. Yes, to the extent that the works are outlined in clause X of Annexure X of the Deed of Agreement and are required to be completed under the Deed of Agreement before a Certificate of Practical Completion can be issued.
2. No, to the extent that the works are permitted building works or other works carried out by Taxpayers 1 and 2 on Block A.
Question 2
Are the works non-monetary consideration, pursuant to section 9-15 of the GST Act, for the acquisition of Block A by Taxpayers 1 and 2 from the relevant authority?
Answer
Yes, to the extent that the works are works described within answer 1 to question 1.
Question 3
If the answer to question 1 and 2 is yes, is the methodology proposed by Taxpayers 1 and 2 (in accordance with the agreement in clause X of the Contract of Sale) to value the non-monetary consideration provided by Taxpayers 1 and 2 to the relevant authority, fair and reasonable?
Answer
No. As outlined in question 1 and 2 the non-monetary consideration will be limited to those works outlined in clause X of Annexure X of the Deed of Agreement and are required to be completed under the Deed of Agreement before a Certificate of Practical Completion can be issued. It does not include works you received a separate payment for.
Issue 2
Question 1
Will Entity C (Taxpayer 3) make a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) of development services to the relevant authority in completing the Block B Buyer's Works pursuant to the Contract for Sale and Crown Lease (collectively referred to as the Block B Transaction Documents) on Block B?
Answer
No.
Question 2
Are the Block B Buyer's Works undertaken by Taxpayer 3, pursuant to the Block B Transaction Documents, non-monetary consideration, pursuant to section 9-15 of the GST Act, for the acquisition of Block B by Taxpayer 3 from the relevant authority?
Answer
No
Question 3
If the answer to question 1 and 2 is yes, is the methodology proposed by Taxpayer 3 (in accordance with the agreement in clause X of the Contract of Sale) to value the non-monetary consideration provided by Taxpayer 3 to the relevant authority fair and reasonable?
Answer
Not applicable.
Relevant facts and circumstances
You have advised that Entity D as Bare Trustee for:
· Entity A (Taxpayer 1)
· Entity B (Taxpayer 2)
· Entity C (Taxpayer 3)
(collectively, the three Taxpayers)
entered into two Contracts for Sale with the relevant authority to purchase and develop land located in the relevant State/Territory (namely, Block A and Block B as defined below). We have not attempted to verify the bare trustee arrangement and the issue of the private ruling does not constitute our acceptance of this.
The development on Block A will consist of the construction of an office building pursuant to the Agreement For Lease (discussed below) and a mixed use development.
The development on Block B will consist of an approved development in accordance with plans and specifications to be submitted to and approved by the relevant authority.
The three Taxpayers are registered for GST.
Background facts relevant to the Block A transaction
Entity D as Bare Trustee for Taxpayers 1 and 2 entered into a contract with the relevant authority on ddmmyyyy (Block A Contract) to purchase and undertake the development of land referred to as Block A (Block A Land).
As part of the arrangement, Entity D has entered into a holding lease with the relevant authority for Block A (the Block A Holding Lease) and attached Deed of Agreement for particular development services to be provided by Entity D to the relevant State/Territory (the Deed).
The arrangement in relation to the Block A Land is governed by the Block A Contract and annexures (collectively, the Block A Transaction Documents):
· Contract for Sale dated ddmmyyyy and entered into between the relevant authority and Entity D as Bare Trustee for Taxpayers 1 and 2.
· Annexure X:
- Specimen Holding Lease for X months to be granted on Completion, with the purpose clause of subdivision and constructing the works and building in accordance with the requirements of the Specimen Deed of Agreement. Expected completion of the contract was ddmmyyyy, however, multiple extensions were granted with actual completion occurring on ddmmyyyy.
- Specimen Deed of Agreement.
· Annexure X - Background Documents List.
· Annexure X - Block Details Plan.
· Annexure X - Agreement for Lease between the relevant State/Territory and Entity D as Bare Trustee for Taxpayers 1 and 2 (undated and unsigned) required to be entered into as a condition of Completion.
· Annexure X - Clearance Certificate.
Under the Block A Contract:
· The relevant authority, as delegate of the relevant authority and on behalf of the relevant State/Territory will grant, or will procure the grant of the Lease to Entity D on Completion.
· The Lease is defined as the holding lease and attached Deed of Agreement (substantially in the form of the Specimen Lease to be granted to the Buyer.
· The Block A Holding Lease will be granted upon the terms and conditions of the draft Specimen Lease and Deed.
· The Price is specified as $X (Block A Price).
· The parties acknowledge that the value of the Works is $X.
· Each party must also be ready, willing and able to complete the Contract for Sale of Block A at the Date of Completion and must complete that contract at the Date of Completion of the Block B Contract.
· Entity D must enter into an Agreement for Lease and the relevant authority must procure that the relevant State/Territory enters into the Agreement for Lease. The Agreement for Lease is Annexure X to the Contract for Sale and it requires, among other things, Entity D to complete certain building and construction works (the Block A Building Works).
· The relevant authority authorises Entity D to enter the Block A Land in order to carry out certain activities, such as demolish any existing improvements or inspect the land or do other things reasonably necessary to assist in the preparation of an application for approval to do works on the Land. If for any reason this Contract is terminated or rescinded, the relevant authority must pay Entity D a proportion of the amount of the $X that Entity D would have been entitled to claim from the relevant authority.
· Entity D must undertake certain works under the Deed, including:
1) 'Works' - construct, modify or demolish fixtures outside the boundaries of the Land owned or to be transferred to the relevant State/Territory or any provider of a utility service under the Deed (the Block A Works).
2) 'Land Works' - other works required under the Deed other than the Block A Works (the Block A Land Works)).
· The parties acknowledge and agree that the 'Works' (Block A Works) and 'Land Works' (Block A Land Works) are consideration for the grant of the Lease and are a taxable supply made by Entity D.
· To the extent that the consideration provided for the grant of the Lease (Block A Holding Lease) is a taxable supply made by Entity D, the parties acknowledge and agree that:
1) the value of the consideration that is a taxable supply provided by Entity D (other than the Block A Works) is equal to the value of the Block A Holding Lease (and the Deed) less the Block A Price less the value of the Block A Works
2) the value of the consideration that is a taxable supply made by Entity D (other than the Block A Works) is equal to the cost to Entity D of that consideration (excluding any amounts in respect of GST for which Entity D is entitled to an input tax credit), reasonably determined by Entity D and set out in a tax invoice required to be issued by Entity D under the Block A Contract
3) the GST amount that would otherwise be payable by Entity D to the relevant authority will be reduced by the amount of GST payable on the consideration that is a taxable supply by Entity D
4) Entity D must issue to the relevant authority a tax invoice for the consideration that is a taxable supply by Entity D on Completion.
Under the Block A Holding Lease:
· The lessee (Entity D) holds the land for the term of X months for the specified purpose.
· Rent at the rate of X per annum is payable if and when demanded by the relevant authority.
· The lease outlines the purpose for which the premises can be used.
· The works are to be completed within X months from the date of execution of the Deed.
· Entity D must apply for leases (Consequent Leases) within X months of the date of issue of the Certificate of Practical Completion in relation to the completion of construction of a stage of the works.
Under the Deed:
· The relevant authority and Entity D agree that an estate will be developed on the Land in the manner contemplated by the Deed and the Block A Holding Lease.
· Works means all the works and activities which the Developer is or may be required to execute and engage in under the Deed and includes all design, variations, remedial work and temporary work as specified in Annexure X and Annexure X.
· Upon compliance with the requirements of the Deed, the relevant authority will grant one or more Consequent Leases for the site and the Block A Holding Lease will be progressively surrendered for that purpose.
· Entity D must, at its own costs and in accordance with the requirements within the Deed and Block A Holding Lease, undertake the design, construction and completion of the Block A Works listed in Annexure X of the Deed (the Development Plan).
· The Development Plan specifies that Entity D is required to undertake the Block A Works including the preparation and approval of a detailed Development Plan, which involves the engineering design, construction and completion of the following Block A Works:
1) Roadworks, car parking, intersections, paths, retaining walls, fencing, traffic control devices, street signs and temporary traffic management.
2) Services including sewer reticulation and services, water supply, water services, stormwater, temporary cut-off drains, telecommunications reticulation, underground electricity reticulation, substations, street and pathway lighting, gas reticulation and relocation of existing services as required.
3) Landscaping and paving including street tree planting, tree removal/surgery, open space landscaping including public realm areas and boundary interfaces, public art, road verge landscaping, path paving and associated ancillary works adjacent to commercial buildings, grassing of other disturbed areas, tree protection and management measures (including tree surgery) for trees to be retained and weed management).
4) Water quality control measures, water sensitive urban design infrastructure, erosion and sediment control works.
5) Off-site works.
6) Demolition and removal of obsolete assets and ancillary works and remediation of the site in accordance with the approvals and requirements of the relevant authorities.
7) Upgrade of street lighting in adjacent roads.
8) Any other works required by the relevant State/Territory and relevant authority.
· Building works are permitted on the leased land by the Lessee in accordance with the Holding Lease and these buildings works are not included in the works required to be completed under the Deed and are therefore not subject to the issue of a Certificate of Practical Completion under the Deed.
· Demolition is to be undertaken by the Developer for a lump sum consideration of $X.
· Entity D is responsible for providing all services necessary to service the development on Block B. Such works are costed into the security for uncompleted works.
· Entity D must apply to the relevant authority for the issue of Consequent Leases to itself within six months after the issuance of the Certificate of Practical Completion.
· The Deed includes the following requirements with respect to the development of Block B:
· The Developer shall complete a single Development Plan for the whole development including the off-site works for Block A and Block B.
1) A concept plan for the development of Block B to be submitted as part of the Development Plan.
2) Construct a new shared path along the full frontage of Block A and Block B.
3) The off-site works in the Deed include the servicing of Block B.
4) Take into account the interdependencies of the two sites (Block A and Block B) in its design and construction programs.
· Security for interdependent work and scheduled engineering services.
· The amount of security for interdependent works and scheduled engineering services is $X.
· Prior to the issue of a Certificate of Practical Completion within each stage the Developer shall lodge with the relevant authority security for uncompleted work or a contribution to the relevant authority for all uncompleted work.
· Under the Agreement for Lease:
· Entity D (Lessor) is required to erect a building and grant the lease to the relevant entity on the terms and conditions of the Agreement for Lease.
· Entity D must grant and the relevant entity must accept the grant of a lease of the premises.
· Entity D is required to lodge a plan that includes all plans, drawings and specifications to show that the Block A Building Works will be carried out in accordance with the relevant requirements.
· The building works are required to be carried out by Entity D at its own cost.
· The Lessor (Entity D will bear the risk.
Notice of Decision:
· On ddmmyyy, after entering into the contract to acquire a X month Development lease which provided for the grant of a X year Crown lease thereafter on satisfying various conditions, a Development Application (DA) was lodged with respect to development of the site. The contract was settled on ddmmyyyy and the X month Development lease to the taxpayer commenced on ddmmyyyy.The Notice of Decision about the Development Application was issued subsequently on ddmmyyyy.
· The development referred to in the Notice of Decision becomes the 'works and building' as referred to in the Holding Lease that must be constructed on the land within the relevant timeframe.
Other documents provided for Block A
Valuation dated ddmmyyyy.
Executed Holding Lease.
Executed Deed of Agreement.
Notice of Decision.
Stamp duty assessment outlining the dutiable value is $X.
Background facts relevant to the Block B transaction
Entity D as bare trustee for Taxpayer 3 entered into a contract with the relevant authority on ddmmyyyy (Block B Contract) to purchase and undertake the development of land referred to as Block B (Block B Land).
As part of the arrangement, Entity D will enter into a X year Crown Lease with the relevant authority for Block B (the Block B Crown Lease).
The arrangement in relation to the Block B Land is governed by the Block B Contract and annexures (collectively, the Block B Transaction Documents):
· Contract for Sale dated ddmmyyy and entered into between the relevant authority and Entity D as Bare Trustee for Taxpayer 3.
· Specimen Lease.
· Background Documents List.
· Block Details Plan.
· Clearance Certificate.
Under the Block B Contract:
· The relevant authority will grant, or will procure the grant of, the Lease to Entity D.
· The Block B Crown Lease will be granted upon the terms and condition of the draft Specimen Lease.
· The Price is specified as $X (Block B Price).
· Each party must also be ready, willing and able to complete the Contract for Sale of Block A at the Date of Completion and must complete that contract at the Date of Completion of this Block B Contract.
· The relevant authority authorises Entity D to enter the Block B Land in order to carry out certain activities, such as demolish any existing improvements, do other things necessary to assist in the preparation of an application for approval to do works on the Land, or inspect the land.
· The parties acknowledge and agree that the works that Entity D must undertake on the Block B Land under the Block B Contract (Block B Buyer's Works) are consideration for the grant of the Lease (ie the supply of the Block B Land) and are a taxable supply made by Entity D.
· The Block B Buyer's Works are the works that the Buyer must undertake on the Block B Land under the Block B Contract.
· With reference to the Block B Crown Lease (see below), Entity B, as lessee, agrees to complete the erection of an approved development in accordance with plans and specifications prepared by Entity D and previously submitted to and approved in writing by the relevant authority.
· To the extent that the consideration provided for the grant of the Block B Crown Lease is a taxable supply made by Entity D, the parties acknowledge and agree that:
1) The value of the consideration that is a taxable supply provided by Entity D is equal to the value of the Block B Crown Lease less the Block B Price.
2) The value of the consideration that is a taxable supply made by Entity D is equal to the cost to Entity D of that consideration (less any amounts in respect of GST for which Entity D is entitled to an input tax credit), reasonably determined by Entity D and set out in a tax invoice required to be issued by Entity D under the Block B Contract.
3) Entity D must issue to the relevant authority a tax invoice for the consideration that is a taxable supply by Entity D on completion.
Under the Block B Crown Lease:
· This is a market value lease.
· The lessee (Entity D holds the land for the term of X years for the specified purpose in clause 3(b).
· Rent at the rate of X cents per annum.
· The lease is for various purpose.
· Entity D must undertake the following:
a) complete, within X months from the date of the commencement of the Block B Crown Lease complete the erection of an approved development in accordance with plans and specifications prepared by Entity D and previously submitted to and approved in writing by the relevant authority
b) provide and maintain additional site works, namely:
- drained and sealed car parking areas
- landscaping
- lighting to illuminate all public areas, carparks and driveways
- loading and unloading areas for vehicles
- access on the land for persons with disability
c) and, also:
- implement noise attenuation measures
- preserve all trees on the land
- screen and keep screened all service areas and plant and machinery to the relevant authority's satisfaction.
For clarity, in this private ruling the above requirements at points (a) to (c), which Taxpayer 3 is required to undertake within a specified time period, are referred to as 'Block B Buyer's Works'. If the context requires, point (a) is referred to as 'approved development' and the other points, (b) and (c), 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 Taxpayer 3 under the lease remain unpaid for X months after the appointed payment date.
- Taxpayer 3 fails to complete an approved development within the timeframe specified.
- After completion of the approved development, the land is not used for an approved purpose for at least a specified period. Taxpayer 3 fails to observe or perform any other covenants contained in the Crown Lease and fails to remedy such breach within X months after the relevant authority serves Taxpayer 3 with written notice of the breach.
Subject to Taxpayer 3 paying all money required to be paid under the provisions of the relevant legislation, Taxpayer 3 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.
Other documents provided for Block B
Valuation dated ddmmyyyy.
Executed Crown Lease.
Stamp duty assessment outlining the dutiable value is $X.
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 Subsection 9-15(1)
A New Tax System (Goods and Services Tax) Act 1999 Division 81
A New Tax System (Goods and Services Tax) Act 1999 Division 82
Reasons for decision
Issue 1
Question 1
Section 9-5 provides that you make a taxable supply if:
a) you make the supply for consideration
b) the supply is made in the course or furtherance of an enterprise that you carry on
c) the supply is connected with the indirect tax zone (Australia), and
d) you are registered, or required to be registered, for GST.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
Supply
The meaning of 'supply' is given in section 9-10. A supply is any form of supply whatsoever and includes:
· A supply of goods.
· A supply of services.
· An entry into an obligation to do anything.
Taxpayers 1 and 2 entered into an arrangement (through a bare trustee) for the acquisition and development of Block A.
The arrangement in relation to the acquisition and development of Block A is governed by the the Block A Transaction Documents.
Taxpayers 1 and 2 were granted a Holding Lease by the relevant authority pursuant to the Contract for Sale, for a term of X months, for the purpose of subdivision and constructing the works and building in accordance with the requirements of the Deed. Upon compliance with the requirements of the Deed, the relevant authority will grant Taxpayers 1 and 2 in relation to the completion of construction of a stage of the works, Consequent Leases and the Holding Lease will be progressively surrendered for that purpose. Consequent Leases are long term (X year) leases.
The 'works' in the Holding Lease are all the works and activities which the Lessee is or may be required to execute or engage in under the deed and includes design, remedial work, temporary work and variations of work.
The term 'building' in the Holding Lease is any building or structure, constructed or partially constructed or to be constructed, as the context permits or requires, on or under the land.
The term 'works' in the Deed is all the Works and activities which the Developer is or may be required to execute and engage in under the Deed and includes all design, variations, remedial work and temporary work as specified in Annexure X and Annexure X.
The proposition that an entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient) was noted by the High Court in Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49 at [34].
The provision of development services by Taxpayers 1 and 2 will be a supply made to the relevant authority.
Supply for consideration
The requirement in section 9-5(a) is that the supply is made for consideration. Section 9-15 provides that consideration includes any payment in connection with a supply of anything and any payment in response to or for the inducement of a supply of anything.
A 'payment' is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form, such as:
· providing goods
· granting a right or performing a service (an act), and
· 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 Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration at paragraphs 69-70, 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'.
Pursuant to the Contract for Sale, the price of Block A is specified as $X (exclusive of GST). However, Taxpayers 1 and 2 are also required to undertake works (as defined in the Holding Lease and Deed) on Block A before long term leases are granted. The works could constitute non-monetary consideration but in order to form part of the consideration for the acquisition of Block A a relevant nexus must be established.
The Block A Transaction Documents support that there will be a connection between the development services to be supplied by Taxpayers 1 and 2 to the relevant authority and the supply of Block A by the relevant authority to Taxpayers 1 and 2. However, closer examination of the facts is required to determine the true nature of the arrangement, which will then inform which development services, will be made for the supply of Block A.
The Holding Lease will be granted to Taxpayers 1 and 2 for the purpose of subdivision and constructing the works and building in accordance with the requirements of the Deed. As outlined above, the term 'works' in the Deed is all the works and activities which the Developer is or may be required to execute and engage in under the Deed and includes all design, variations, remedial work and temporary work as specified in Annexure X and Annexure X.
Further, as outlined above, the term 'building' is not defined in the Deed. However, a definition is included in the Holding Lease as any building or structure, constructed or partially constructed or to be constructed, as the context permits or requires, on or under the land.
Clause X of the Deed provides that upon compliance with the requirements of the Holding lease and the Deed, the relevant authority will grant one or more Consequent Leases (X year leases) under the relevant legislation, the Holding Lease being progressively surrendered for that purpose.
Clause X of Annexure X of the Deed, described as the Development Plan, provides a list of works to be completed.
Clause X of Annexure X provides that building works are permitted on the leased land by the Lessee in accordance with the Holding Lease and relevant approvals by the relevant authority and that these building works are not included in the works required to be completed under the Deed and are therefore not subject to the issue of a Certificate of Practical Completion under the Deed.
Annexure X outlines special conditions and guidelines with which the developer must comply in relation to the project.
Clause X of the Deed outlines security for interdependent work and scheduled engineering services. Annexure X provides a $X amount of security for the interdependent works and scheduled engineering services.
In the event that the Developer fails to complete the interdependent works specified in Annexure X within the time specified in Annexure X and an application for an extension of time is refused, the Developer shall be liable to the relevant authority, by way of pre estimated and liquidated damages and not as a penalty, for the amount or amounts stated in Annexure X of the Deed for the period that the works remain incomplete.
Clause X of the Deed outlines that prior to the issue of a Certificate of Practical Completion within each Stage the Developer shall lodge with the relevant authority either:
a. a security for uncompleted work; or
b. a contribution to the relevant authority for all uncompleted work.
Finally, the Holding provides that when the Lessee has obtained a Certificate of Practical Completion in relation to the completion of construction of a stage of the works specified in the Deed as a separable part of the works to the satisfaction of the relevant authority the Lessee shall surrender to the relevant authority this lease insofar as it relates to that stage and the relevant authority will grant to the Lessee under the relevant legislation the relevant and specified separate leases in a form consistent with the Deed.
The development works to be completed before the issue of the Consequent Leases (X year long term leases) are those referred to in clause X of Annexure 1. This is supported by Part X of the Deed.
Part X of the Deed, clause X, provides that after the Developer has received Certificates of Final Design Approval and Certificates of Operational Acceptance from all relevant authorities for all works within a stage, the Developer shall apply for a Certificate of Practical Completion for that Stage. Pursuant to clause X of the Deed, the Developer shall, within X months (or within such further time as may be approved) from the date of issue of the Certificate of Practical Completion for the relevant Stage, apply to the relevant authority for the issue of Consequent Leases as specified in Annexure X (of the Deed) to itself.
In the Commissioner's view, having regard to all the facts and circumstances of an arrangement, a sufficient nexus is established 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. The supply of development services so specified moves the grant of the lease to the developer, in this case, you.
The Certificate of Practical Completion is a prerequisite for the issue of the long term Consequent Leases. The Block A Transaction Documents make it clear that the building works are not included in the works required to be completed under the Deed and are therefore not subject to the issue of a Certificate of Practical Completion under the Deed.
Put another way, the building works are permitted on the leased land by the Lessee in accordance with the Holding Lease and relevant approvals by the relevant authority, before the transfer of the land to the Developer under the Consequent Leases. However, the grant of the Consequent Leases is not conditional on all building works being completed on the Land. An example of building works which are not a pre-requisite to the issuing of the consequent leases is the office building and mixed use development that are permitted to be constructed.
In contrast, the development services referred to in clause X of Annexure X that must be completed under the Deed before a Certificate of Practical Completion is issued, do have the relevant nexus.
Consequently, only those development services referred to in clause X of Annexure X that are required to be completed before a Certificate of Practical Completion is issued have the relevant nexus to the consideration provided by the relevant authority. Taxpayers 1 and 2 will therefore provide only those specified development services as consideration to the relevant authority for the supply of Block A in addition to the price under the contract.
The supply is made in the course or furtherance of an enterprise that you carry on
The supply of development services is made in the course of Taxpayers 1 and 2's enterprise if Entity D is merely a bare trustee as you have advised.
The supply is connected with the indirect tax zone (Australia)
As per the facts stated above the supply of development services is made in Australia (ie as the development services are undertaken on Block A).
You are registered, or required to be registered, for GST
As per the facts stated above, Taxpayers 1 and 2 are registered for GST.
Conclusion
Taxpayers 1 and 2 will make a supply of development services to the extent that the development services are outlined in clause X of Annexure X of the Deed and are required to be completed under the Deed before a Certificate of Practical Completion can be issued.
The supply of development services is consideration provided to the relevant authority for the supply of Block A by way of lease to Taxpayers 1 and 2.
As the remaining requirements of section 9-5 are satisfied and the supply of development services will not be GST-free or input taxed, Taxpayers 1 and 2 will make a taxable supply to the relevant authority (to the extent that the development services are outlined in clause X of Annexure X of the Deed and are required to be completed under the Deed before a Certificate of Practical Completion can be issued).
Question 2
As stated above, there is a sufficient nexus between the development services (outlined in clause X of Annexure X of the Deed and are required to be completed under the Deed before a Certificate of Practical Completion can be issued) supplied by Taxpayers 1 and 2 to the relevant authority and the supply of Block A by way of lease by the relevant authority to Taxpayers 1 and 2.
The Holding Lease will be granted for the purpose of subdivision and constructing the works and building in accordance with the requirements of the Deed.
Upon your compliance with the requirements of the Holding Lease and Deed, the relevant authority will grant one or more Consequent Leases (long term X year leases) for the site under the relevant legislation, the Holding Lease being progressively surrendered for that purpose. The Block A Transaction Documents state:
· Clause X of the Holding Lease provides that once Taxpayers 1 and 2 have obtained a Certificate of Practical Completion (as defined in the Deed) in relation to the completion of construction of a stage of the works as specified in the Deed as a separable part of the works to the satisfaction of the relevant authority, Taxpayers 1 and 2 shall in accordance with the requirements of Clause X of the Deed surrender to the relevant authority the Holding Lease insofar as it relates to that stage and the relevant authority will grant to Taxpayers 1 and 2 under the relevant provisions the relevant and specified separate leases in a form consistent with the Deed.
· Clause X of the Deed provides that within X months (or within such further time as may be approved) from the date of issue of the Certificate of Practical Completion for the relevant Stage, Taxpayers 1 and 2 shall apply to the relevant authority for the issue of Consequent Leases.
It is the Commissioner's view that for real property transactions, 'consideration' has the relevant nexus where it is anything that 'moves' the transfer of the land.
Only those works referred to in clause X of Annexure X move the transfer of Block A and are non-monetary consideration for the supply of Block A by the SLA.
We note that Clause X of the Deed provides for the demolition and removal of obsolete assets and ancillary works and remediation of the site.
To the extent Taxpayers 1 and 2 receive payment from the relevant authority for the demolition works outlined above, this is a fee for service in the course of their enterprise activities. The demolition works are not payment for the land.
For completeness, we also note that Special Condition X of the Contract requires the Buyer to enter into the Agreement For Lease. Pursuant to the Agreement For Lease, Taxpayers 1 and 2 will erect the building to be leased to the relevant entity and carry out the building works. The works completed pursuant to the Agreement For Lease, will not be non-monetary consideration for the supply of Block A by the relevant authority. These are Taxpayers 1 and 2's own building costs.
The building works permitted on the leased land by the lessee in accordance with the Holding Lease, specified in clause X, are not included in the works required to be completed under the Deed and are therefore not subject to the issue of a Certificate of Practical Completion under the Deed. The Lessee is allowed or permission is granted for the works to be undertaken from the date of issue of the Holding Lease. The Building Works referred to in clause X do not 'move' the transfer of Block A by way of lease and are not consideration for the supply of Block A by the relevant authority.
The Contract for Sale provides for a monetary payment of $X (exclusive of GST) to be made by Taxpayers 1 and 2 for the supply of Block A by the relevant authority. The payment of this amount is also consideration paid by Taxpayers 1 and 2 for the supply of Block A by the relevant authority.
Special condition X of the Block A Contract
Special condition X provides that Taxpayers 1 and 2, and the relevant authority agree that the Block A Works and Block A Land Works are consideration for the grant of the Block A Crown Lease and the Block A Works and Block A Land Works are a taxable supply made by the Taxpayers 1 and 2.
To be a taxable supply, a supply must be made for consideration. It is the view of the High Court that 'for' is not used to adopt contractual principles, 'rather, it requires a connection or relationship between the supply and the consideration.'
In AP Group Limited v. FC of T, (AP Group Limited) the Full Federal Court considered the meaning of 'for' and observed in obiter:
The consideration must be 'in connection with' the supply but the supply must also be 'for' the consideration... It ensures that not every connection between the giving of consideration and the provision satisfy the first condition of making a taxable supply. If it were otherwise, any form of connection of any character between the making of a supply and the payment of consideration would suffice.
This position from AP Group Limited is adopted in GSTR 2012/2 Goods and services tax: financial assistance payments at paragraph 15 and paragraph 15A.
Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. The test is an objective one and reference to all of the surrounding circumstances of the arrangement is relevant to determine whether consideration is made in connection with the supply under section 9-15.
No factors are determinative on their own, and the arrangement must be considered as a whole. The description given to the arrangement by the parties in labelling a thing consideration, whilst relevant, is not determinative '...as the parties cannot by the mere words of their contract turn it into something else. Their relationship is determined by the law and not by the label they choose to put on it.' This view is further supported by Gray J in Re Porter; Re Transport Workers Union of Australia (1989) 34 IR 179 at 184:
A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it... the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.
Consequently the labelling of a thing by the parties as consideration is not determinative of the issue. Considering the arrangement as a whole and in accordance with the reasoning above, only those works referred to in clause X of Annexure X of the Deed, required to be completed under the Deed before a Certificate of Practical Completion can be issued, are non-monetary consideration for the supply of Block 8 by the SLA.
Division 81 and Division 82
On the facts submitted to us, the provision of consideration by Taxpayers 1 and 2, for the supply of Block A is not a payment that is an 'Australian tax', or 'Australian fee or charge' as defined in section 195-1 and therefore Division 81 has no application.
Furthermore, Taxpayers 1 and 2's supply of development services is made in return for a supply of Block A to Taxpayers 1 and 2 by the relevant authority (as opposed to a supply of a right to develop the land) and therefore Division 82 also has no application.
Question 3
By virtue of paragraph 9-75(1)(b) where the consideration for a supply is not expressed as an amount of money, the price for that supply is the GST inclusive market value of that consideration.
Paragraph 138 of GSTR 2001/6 Goods and services tax: non-monetary consideration states:
138. Where the consideration for a supply is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply.... In most circumstances where parties are dealing at arm's length, we are of the view that the goods, services or other things exchanged are of equal GST inclusive market value....
The ATO view about how to value the non-monetary consideration provided for supplies made under a development lease arrangement is explained at paragraphs 68 to 73 of Goods and Services Tax Ruling GSTR 2015/2 Goods and services tax: development lease arrangements with government agencies. In particular, paragraphs 69, 70 and 71 state:
69. Where the parties to a development lease arrangement are dealing with each other at arm's length, the Commissioner considers that the things exchanged between the parties are of equal GST inclusive market value.... Therefore, in the context of a development lease arrangement between a government agency and a developer, the parties can use a reasonable valuation method... as agreed between them to determine the GST-inclusive market value of any non-monetary consideration for supplies arising in the context of a development lease arrangement....
70. For example, the full costing of the development works, undertaken by the developer as part of a competitive tender process, which takes into account the full cost of construction (including builder margins), provides a reasonable basis for determining the GST-inclusive market value of the supply of development services by the developer. It also provides a reasonable basis for calculating the price of the government agency's related supply of land (or grant of a call option).
71. Similarly, a professional valuation of the land (including the development works) provided by the government agency to the developer, with appropriate adjustments made for any monetary consideration also provided for the land by the developer..., would also be a reasonable basis for the parties to determine and agree upon the GST-inclusive market value of the development services supplied by the developer. It would also provide a reasonable basis for calculating the price of the government agency's related supply of land (or grant of a call option)....
In this case, as discussed above, pursuant to the terms of the agreement between the parties there exists a nexus between the parties' respective supplies. As explained at paragraph 69 of GSTR 2015/2, the parties can use a reasonable valuation method as agreed between them to determine the GST- inclusive value of their respective supplies.
The parties to the arrangement intend to determine the GST-inclusive market value of the development services provided by Taxpayers 1 and 2 to SLA with reference to a professional valuation of the land (including the development works) less the monetary payment. In accordance with paragraph 138 of GSTR 2001/6 and as explained at paragraphs 71 and 83 of GSTR 2015/2, such a method would be a reasonable basis for calculating the price of the Block A Land supplied by the relevant authority to Taxpayers 1 and 2 as long as it excludes the value of the Block A Building Works or works you receive a separate payment for.
However, under your proposed methodology, you intend to include the Block A Land Works and the Block A Building Works.
As outlined in question 1 and 2 the non-monetary consideration will be limited to those works which are outlined in clause X of Annexure X of the Deed and are required to be completed under the Deed before a Certificate of Practical Completion can be issued. It does not include works you received a separate payment for.
Therefore, you proposed methodology is not reasonable to the extent that it includes:
· the Block A Building Works, or
· any Block A Land Works for which you receive a separate payment up to $X from the relevant authority.
The Commissioner would accept that a reasonable basis could be achieved if the non-monetary consideration was limited to those works accepted as development services under question 1 and 2.
Issue 2
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 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/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/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/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 Taxpayer 3 is for X 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/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 Taxpayer 3 or the lessee at the time is entitled to compensation for the development. The requirement to pay the lessee compensation for improvements when a lease is not renewed supports a conclusion that the Block B Buyer's Works are retained for the benefit of the lessee and are not provided to the relevant State/Territory.
The purchase price stated in the Contract is $X. Stamp Duty was paid on the basis that the consideration for the grant of the X year lease - a market value lease - was $X.
The anticipated cost of the development you plan to complete is $X.
As with any Crown Lease in the relevant State/Territory, there are obligations about how the land can be used for the benefit of Taxpayer 3 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 Taxpayer 3 could have the Crown Lease terminated for breaching provisions of the lease does not alter that it acquired the lease for a consideration of $X. It is a typical feature of a lease that it can be terminated for breaches of the lease.
Taxpayer 3's agreement with the relevant authority that the approved development will 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/Territory's broader land development policy of ensuring timely and orderly development of the area and to avoid land-banking by developers.
Taxpayer 3 will seek approval for a type of development after completion of the Contract and the grant of the Crown Lease. The conditions in the Contract and outlined in the Lease are in the nature of acknowledgements by Taxpayer 3 that the lease would have certain restrictions and that it was aware of these. This prevents Taxpayer 3 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/Territory's policy outcome rather than the provision to the relevant State/Territory of something which has measurable economic value.
The relevant State/Territory will not derive any economic benefit from any proposed development being built on the land other than having the relevant land developed in a manner consistent with policy and design guidelines. Only Taxpayer 3 is able to sell any future premises/dwellings contained on the land.
We note that the Crown Lease simply sets parameters within which the land's use can be considered. The purpose clause in this case is broad allowing a varied potential development.
Taxpayer 3 is required to provide and maintain additional site works under Clause X of the Crown Lease. These additional site works can only be provided on the site after Taxpayer 3 is already the lessee under the Crown Lease. Taxpayer 3 will 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 land they are leasing.
For completeness we note, although special condition X provides that you and the relevant authority agree that the Block B Buyer's Works are consideration for the grant of the Block B Crown Lease, the only consideration you have provided is the monetary consideration and there was no non-monetary consideration. Refer to Question 2 for further information.
Conclusion
Complying with the requirements of the Block B Transaction Documents does not result in Taxpayer 3 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/Territory. The Block B Buyer's Works do not benefit the relevant authority, rather they benefit Taxpayer 3 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 State/Territory or relevant authority.
In the absence of a supply from Taxpayer 3 to the relevant authority under the arrangement, there is no taxable supply of Block B Buyer's 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.
For real property transactions, 'consideration' has the relevant nexus where it 'moves' the transfer of the land.
Effect of the arrangements
Taxpayer 3 has entered into a Contract for the grant of a X year Crown Lease - being a market value lease and paid monetary consideration of $X. This is consistent with the value of the land being $X and there is no reason anyone dealing at arm's length with the relevant State/Territory would pay additional non-monetary consideration that costs about $X (plus GST) to provide.
On ddmmyyyy, having paid the balance of the purchase price, Taxpayer 3 was granted a Crown Lease over Block B 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 Block B Transaction Documents do not support the view that the relevant authority receives something in addition to the monetary consideration provided for Block B. The relevant authority does not derive any economic benefit associated with the Block B Buyer's Works, being:
1) The dwellings constructed on the land:
- Only Taxpayer 3 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 Taxpayer 3.
2) Additional site works which Taxpayer 3 is required to provide, maintain and implement under Clause X of the Crown Lease:
- These additional site works are owned by Taxpayer 3 (to the extent that real property can be owned in the relevant State/Territory) and benefit Taxpayer 3 for the duration of the lease.
As such, something of economic value does not pass to the relevant State/Territory or the relevant authority and cannot be considered to be non-monetary consideration for the supply of Block B 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 Taxpayer 3, 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 Block B Buyer's Works are retained for the benefit of the lessee as opposed to constituting any economic benefit that passes to the relevant State/Territory or the relevant authority.
Finally, the terms of the arrangement outlined in the Block B 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 State/Territory 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 Taxpayer 3. The rent remains a nominal amount of X per annum. The lease will continue for X 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 Block B Buyer's Works are not required to be performed in order for the Crown Lease to be granted to Taxpayer 3, and thus they do not 'move' the transfer of the land by way of lease.
Special condition X of the Block B Contract
Special condition X provides that Taxpayer 3 and the relevant authority agree that the Block B Buyer's Works are consideration for the grant of the Block B Crown Lease and the Block B Buyer's Works are a taxable supply made by Taxpayer 3.
To be a taxable supply, a supply must be made for consideration. It is the view of the High Court that 'for' is not used to adopt contractual principles, 'rather, it requires a connection or relationship between the supply and the consideration.'
In AP Group Limited v. FC of T, (AP Group Limited) the Full Federal Court considered the meaning of 'for' and observed in obiter:
The consideration must be 'in connection with' the supply but the supply must also be 'for' the consideration... It ensures that not every connection between the giving of consideration and the provision satisfy the first condition of making a taxable supply. If it were otherwise, any form of connection of any character between the making of a supply and the payment of consideration would suffice.
This position from AP Group Limited is adopted in GSTR 2012/2 Goods and services tax: financial assistance payments at paragraph 15 and paragraph 15A.
Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. The test is an objective one, and reference to all of the surrounding circumstances of the arrangement is relevant to determine whether consideration is made in connection with the supply under section 9-15.
No factors are determinative on their own, and the arrangement must be considered as a whole. The description given to the arrangement by the parties in labelling a thing consideration, whilst relevant, is not determinative '...as the parties cannot by the mere words of their contract turn it into something else. Their relationship is determined by the law and not by the label they choose to put on it.' This view is further supported by Gray J in Re Porter; Re Transport Workers Union of Australia (1989) 34 IR 179 at 184:
A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it... the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.
Consequently, the labelling of a thing by the parties as consideration is not determinative of the issue.
The arrangement between Taxpayer 3 and the relevant authority was for the sale and development of land. Any Block B Buyer's Works undertaken by Taxpayer 3 must comply with relevant planning legislation and obligations inherent in the lease.
The Block B Buyer's Works undertaken by Taxpayer 3 are made in connection with the sale of land. They were not, however, made 'for' the land in relation to the GST Act.
The nexus between 'supply' and 'consideration' is further illustrated in Reliance Carpet where the High Court made the following observation about the connection between a deposit paid by the purchaser of the real estate and a supply by the vendor:
That connection is readily seen from the circumstance that...the payment of the deposit obliged the parties to enter into the mutual legal relations with executory obligations and rights laid out in the contract. Those legal relations were directed to the completion of the Contract by conveyance of the property to the purchaser by the taxpayer upon payment by the purchaser.
The carrying out of the Block B Buyer's Works by Taxpayer 3 will not establish the connection evidenced in Reliance Carpet wherecompletion established mutual legal obligations.
It is erroneous to say that the Block B Buyer's Works undertaken to bring Block B in compliance with relevant State/Territory planning legislation and policy constitutes consideration for a supply made by the relevant authority to Taxpayer 3.
Having regard to this particular arrangement, the labelling of a thing by the parties as consideration is not determinative of the issue, and consequently, the Block B Buyer's Works undertaken by Taxpayer 3 on the Block B land are not consideration for the supply of the land by way of grant of the long-term lease from the relevant authority to Taxpayer 3.
Conclusion
The Block B Buyer's Works are not non-monetary consideration for the relevant authority's taxable supply of Block B to Taxpayer 3 by way of the grant of a Crown Lease.
Question 3
Not applicable.