Edited version of private advice

Authorisation Number: 1051580313249

Date of advice: 11 September 2019

Ruling

Subject: GST and long term leases

Question 1

Does Entity A 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 development works pursuant to the Contract, Project Delivery Agreement and the executed Crown Lease (collectively referred to as the Transaction Documents) on the Land?

Answer

No.

Question 2

Are the development works undertaken by Entity A, pursuant to the Transaction Documents, non-monetary consideration, pursuant to section 9-15 of the GST Act, for the acquisition of the Land by Entity A from the relevant authority?

Answer

No.

Relevant facts and circumstances

Entity A registered for GST from ddmmyyyy and carries on a business of property development.

Entity A was previously known as Entity B and changed its name on ddmmyyyy.

On ddmmyyyy, Entity A (known at that time as Entity B) entered into a contract (the Contract) for the grant of a X year Crown lease for the Land from the relevant authority

Under the Contract the relevant authority agreed to grant, or procure the grant of, a X 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 is $X (including any GST payable) and completion of the Contract occurred on ddmmyyy, at which time the relevant authority was required to, and did grant, 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.

Stamp duty of $X was calculated on the purchase price stated in the Contract of $X.

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.

Under the Contract Entity A must comply with all its obligations under the PDA

Attached to the Contract were the following annexures:

·   Special Conditions

·   Specimen Lease

·   Project Delivery Agreement

·   Background Document Schedule

·   Block Details Plan

The Contract and Annexures form part of the relevant facts and circumstances.

Project Delivery Agreement (PDA)

The PDA is dated ddmmyyyy. It was a requirement of the Special Conditions in the Contract that the PDA was entered into simultaneously with the Contract. The PDA essentially outlines the steps required to obtain development approval and protect relevant State/Territory property such as verges and footpaths during development.

The PDA provides that Entity A is required to sell not less than X% of all dwellings erected on the Land as Affordable Housing.

Security is also required for the performance of Entity A's obligations under the PDA, in the form of a bank guarantee or bank cheque, in the amount of X% of the Contract price. In addition, Entity A charges the whole of its interest in the land in favour of the relevant authority as security for Entity A's performance and allows the relevant authority to register a charge or caveat over the Crown Lease until Entity A's obligations have been fully performed.

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 X years.

·   Entity A is required to pay rent of X per annum.

·   Clause X provides a list of the purposes for which the premises may be lawfully used.

·   Entity A must undertake the following:

(a)  complete, within X months from the Lease commencement date (or such further time approved by the relevant authority in writing) the erection of an 'approved development' on the land 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

(b)  provide and thereafter maintain certain works on the land, in accordance with previously submitted and approved plans and specifications, namely:

·       hydraulic mains, storm water drains, sewer lines, hydraulic fire mains and hydrants

·       storage areas, covered parking, hardstanding car parking, adequately illuminated vehicle access roads, pedestrian pathways and vehicle access drives

·       landscaping

(c)  and, also:

·       provide facilities to enable electrical and telephone cables and wires to be installed underground

·       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

·       screen and keep screened all services areas to the relevant authority's satisfaction and ensure all plant and machinery is suitably screened from public view

·       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 (c), which Entity A is required to undertake within a specified time period, are referred to as 'development 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 Entity A under the lease remain unpaid for X after the appointed payment date.

·   Entity A fails to complete an approved development within the timeframe specified in Clause X.

·   After completion of the approved development, the land is not used for an approved purpose for at least X.

·   Entity A fails to observe or perform any other covenants contained in the Crown Lease and fail to remedy such breach within X after the relevant authority serves Entity A with a 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 obtained development approval on ddmmyyyy for the construction of a multi unit housing complex comprising of X dwelling units and associated works (amended to X dwellings on ddmmyyy).

Entity A completed construction in mmyyyy at a cost of $X excluding GST.

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 had completed the development and received the certificate of compliance, Entity A applied to the relevant authority for approval of the sub-division of the parcel under the relevant legislation. The relevant authority assessed and approved the units plan, whereupon Entity A lodged the approved units plan for registration along with the Crown Lease.

On ddmmyyyy the relevant authority registered the units plan, at which time the Crown Lease came to an end. 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 Entity A with certificates of title for each unit.

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 reasoning:

·   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 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 contracts 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 Entity A 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 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/Territory.

The purchase price stated in the Contract is $X (including any GST payable). 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 final cost of the development was $X excluding GST.

As with any Crown Lease in the relevant State/Territory, there are obligations about how the land could be used for your 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 Entity A acquired the lease for consideration of $X. 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 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.

Entity A obtained development approval on ddmmyyyy for a multi unit housing complex and associated works. 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 Entity A 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/Territory's policy outcome rather than the provision to the relevant State/Territory of something which has measurable economic value. Similarly, the requirement for the Developer to sell not less than X% of the dwellings erected on the Land as Affordable Housing may be seen as in the nature of a restriction on the development of the land that is properly characterised as a condition of the PDA and does not involve the provision to the relevant State/Territory of something which has measurable economic value. While it may impact the profitability of the project if there are different profit margins on different types of units, this is no different to a requirement that soundproofing or fire rating between apartments be of a particular standard. It is a condition for obtaining development approval not the price for the land.

The relevant State/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 X of the Crown Lease. These additional site works can only be provided on the site after you are already the lessee under the Crown Lease. Entity A does not receive any further supply of anything from the relevant agency after completion of these works.

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/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 State/Territory or relevant authority.

In the absence of a supply from Entity A to the relevant State/Territory 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.

For real property transactions, 'consideration' has the relevant nexus where it is anything that 'moves' the transfer of the land.

Effect of the arrangements

Entity A have entered into a Contract for the grant of a X year Crown lease - being a market value lease and paid monetary consideration of $X (including GST). 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 to provide.

On ddmmyyy, 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 Clause X of the Crown Lease.

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

1.   The dwellings Entity A constructed on the land:

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

2.   Additional site works which Entity A are required to provide, maintain and implement under Clause X 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/Territory) and benefit Entity A for the duration of the lease.

As such, something of economic value does not pass to the relevant State/Territory or 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 State/Territory or 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 State/Territory or 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 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 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 relevant authority's taxable supply of the land to Entity A by way of the grant of a Crown Lease.