Edited version of private advice

Authorisation Number: 1051608358713

Date of advice: 10 January 2020

Ruling

Subject: GST and the supply of a right to purchase real property

Question 1

Is granting the option to the overseas entity a taxable supply?

Answer

Yes. The granting of the option to the overseas entity is a taxable supply.

Question 2

Is the supply of services a separate supply to the option?

Answer

Yes. The supply of services is a separate supply to the supply of the option.

Question 3

If the provision of the option is a separate supply, will the above services provided to the overseas entity be GST-free? In particular,

(a)             Is the reimbursement of expenses by the overseas entity a GST-free supply?

(b)             Is the reimbursement of staff costs by the overseas entity a GST-free supply?

Answer

(a)             Yes. The reimbursement of expenses by the overseas entity is consideration for a GST-free supply on the basis that the overseas entity is a non-resident foreign entity that is not registered nor required to be registered for GST.

(b)             Yes. The reimbursement of staff costs by the overseas entity is consideration for a GST-free supply on the basis that the overseas entity is a non-resident foreign entity that is not registered nor required to be registered for GST.

Question 4

Will the milestone payments towards the project be GST-free?

Answer

No. The milestone payments towards the project are consideration for a taxable supply of real property located in the indirect tax zone.

Question 5

(a)             Is exercising the option a taxable supply?

(b)             If the overseas entity buys the assets as opposed to the shares, will the supply be a GST-free supply?

Answer

(a)             No. The exercise of the option is not a taxable supply.

(b)             No. The supply will not be a GST-free supply.

This ruling applies for the following periods:

from xx xxxx 20XX

Relevant facts and circumstances

·                 The taxpayer carries on an enterprise and has granted an option to an overseas entity to acquire a project, which relates to real property located in the indirect tax zone

·                 In the course of developing the project, the overseas entity reimburses the taxpayer for certain expenses and staff costs

·                 The overseas entity also pays the taxpayer certain amounts as each milestone of a project is achieved

·                 On exercise of the option, the taxpayer transfers the development assets of the project to the overseas entity.

Assumption:

·                 The overseas entity is not a resident of Australia and is not registered nor required to be registered for GST.

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 38-190

Reasons for decision

In these reasons, unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999.

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, and

d)               you are registered or required to be registered for GST.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Subsection 9-30(1) provides that a supply is GST-free if it is GST-free under Division 38 or it is a supply of a right to receive a supply that would be GST-free.

Question 1

Subsection 38-190(1) comprises five items which set out supplies of things other than goods or real property that are GST-free. If the requirements of one of those items are met, the supply is GST-free provided subsections 38-190(2) or (3) do not negate that GST-free status.

Paragraph (b) of Item 4 of the table in subsection 38-190(1) provides that a supply that is made in relation to rights is GST-free if:

·                 the supply is to an entity that is not an Australian resident, and

·                 the non-resident is outside the indirect tax zone when the thing supplied is done.

Section 195- defines non-resident to mean an entity that is not an Australian resident.

GSTR 2004/7 outlines the Commissioner's view on when a non-resident is not in the indirect tax zone when the thing supplied is done.

Paragraph 23 of GSTR 2004/7 states that a supply is made to a non-resident for the purposes of paragraph (b) of item 4 if the supply is made to an entity that is a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). A non-resident includes a company that is not a resident of Australia as defined in subsection 6(1) of the ITAA 1936.

For a non-resident company, paragraph 37 of GSTR 2004/7 provides that the company is in the indirect tax zone if it carries on business (or in the case of a company that does not carry on business, carries on its activities) in the indirect tax zone:

(a)             at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b)             through an agent at a fixed and definite place for a sufficiently substantial period of time.

On the issue of when 'the thing supplied is done', paragraphs 198 and 199 of GSTR 2004/7 provide that the phrase has the same meaning as the expression 'the thing is done' in paragraph 9-25(5)(a). If the supply is the grant of a right, the thing supplied is done at the time the right is granted.

On the basis of the assumption set out in this ruling that the overseas entity is a non-resident company, the supply of the right you granted to the overseas entity is GST-free under paragraph (b) of Item 4 in the table under subsection 38-190(1) as the overseas entity is not in the indirect tax zone when you granted the right. However, the GST-free status of the supply is negated if subsection 38-190(2) applies.

Subsection 38-190(2) provides that a supply covered by any of items 1 to 5 in the table in subsection 38-190(1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with the indirect tax zone and would not be GST-free.

Under the Agreement, you granted the overseas entity the right to purchase a project. Each of the projects relates to a wind farm, which is an electricity generating facility to be powered primarily using wind energy. A project is located on land situated in the indirect tax zone.

Subsection 9-25(4) provides that a supply of real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone. 'Land' in this context means the physical land.

Section 195-1 defines real property to include any interest in or right over land. The reference in subsection 9-25(4) to 'land to which the real property relates' means that an interest in, or right over land is connected with the indirect tax zone if the physical land to which the interest or right over it relates is in the indirect tax zone. The test is the location of the land and not the location of the right. [see paragraph 8 of GSTR 2018/1: supplies of real property connected with the indirect tax zone (Australia)]

Your supply of the project will be connected with the indirect tax zone because it is the supply of real property located in the indirect tax zone. It follows that, pursuant to subsection 38-190(2), your supply of the right to the overseas entity is not GST-free because the supply is of a right to acquire something the supply of which would be connected with the indirect tax zone.

Your supply to the overseas entity of the right to purchase the project is for consideration, made in the course or furtherance of an enterprise that you carry on, is connected with the indirect tax zone and you are registered for GST. Therefore, the supply is a taxable supply.

Question 2

GST is structured around the concept of supply. An analysis of the character of a supply may be necessary to determine how a particular provision of the GST Act applies to the supply.

An identification of the essential character of what is supplied may inform whether a particular transaction falls within the terms of a specific statutory provision, and whether it does so wholly or only to some extent. One must consider all of the circumstances of the transaction to ascertain its essential character. However, that does not mean that an economic substance over legal form approach is endorsed for working out the essential character of what is supplied.

By having regard to the essential character or features of the transaction, it can be ascertained whether a supply contains separately identifiable taxable and non-taxable parts or is a composite supply of one thing. It is a composite supply of one thing if one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

A mixed supply is a single supply made up of separately identifiable parts, where one or more of the parts are taxable and one or more of the parts are non-taxable, and these parts are not integral, ancillary or incidental in relation to a dominant part of the supply.

In working out whether a supply is a mixed or composite supply, the key question is whether the supply should be regarded as having more than one separately identifiable part, or whether it is essentially a supply of one dominant part with one or more integral, ancillary or incidental parts.

In many circumstances, it will be a matter of fact and degree whether the parts of a supply are separately identifiable, and retain their own identity.

No single factor (by itself) will provide the sole test to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply.

Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made.

In your case, the overseas entity sought to secure your services with respect to each project and was granted the option of acquiring the project if it is satisfied with the development. The consideration you receive for those services is distinct from the consideration you receive for the granting of the option to the overseas entity.

The option given to the overseas entity is granted on execution of the contract or acceptance of a project offer. Under the Agreement, the overseas entity may or may not exercise the option granted to it. In the circumstances, the fact the overseas entity may choose not to exercise the option to purchase a project indicates that the supply of services is a separately identifiable part to the supply of the project.

Therefore, we consider that your supply of services is a separate supply to the granting of the option to the overseas entity.

Question 3

Paragraph (b) of Item 2 in the table under subsection 38-190 provides that a supply is GST-free if:

·                 a supply is made to a non-resident who is not in the indirect tax zone when the thing supplied is done, and

·                 the non-resident acquires the thing in carrying on the non-resident's enterprise but is not registered or required to be registered for GST.

As discussed in the Reasons under Question 1, a non-resident company is not in the indirect tax zone if it does not carry on business or does not carry on activities:

(a)             at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b)             through an agent at a fixed and definite place for a sufficiently substantial period of time.

On the basis of the assumption set out in this ruling that the overseas entity is a non-resident company that is not registered nor required to be registered for GST, your supply of the services to the overseas entity is GST-free under paragraph (b) of Item 2 in the table under subsection 38-190(1). However, the GST-free status of the supply is negated if either subsection 38-190(2) or (3) applies.

The GST-free status of the supply you make to the overseas entity is not negated by:

·                 subsection 38-190(2) because that provision only applies if the supply is a supply of a right or option to acquire something and your supply of the services to the overseas entity is not a supply of a right or option, and

·                 subsection 38-190(3) because that provision only applies if, among other things, the supply is provided to another entity in the indirect tax zone and your supply to the overseas entity is not one that is provided to another entity.

Therefore, your supply of services to the overseas entity is GST-free provided the overseas entity is not registered nor required to be registered for GST.

Question 4

As discussed earlier, the GST Act is structured around the concept of supply and that an analysis of all of the circumstances of the transaction informs the essential character of what is supplied.

In your case, the essential character of the transaction is that the overseas entity has engaged you to provide certain services (for which they pay you consideration described as a reimbursement of expenses and staff costs) and, eventually, if they are satisfied with the project they will acquire it by exercising the option to purchase the project.

In the course of the development of the project, the overseas entity pays you certain fees described as milestone payments.

In essence, the milestone payments are payments towards the purchase of a project. Each of the projects relates to a wind farm located in the indirect tax zone. As discussed earlier, a supply of real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone.

Therefore, the milestone payments are consideration for a taxable supply because you are making a supply of real property that is connected with the indirect tax zone as the wind farm is located on land situated in the indirect tax zone.

Question 5

Section 9-10 defines 'supply' as any form of supply whatsoever. Without limiting the definition, a supply includes the creation, grant, transfer, assignment or surrender of any right.

Where an entity grants another entity a right or option to acquire a thing, section 9-17 provides that the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option. If there is no such additional consideration, there is no consideration for the supply.

In your case, the overseas entity has the right or option to purchase the development assets from you. When the overseas entity exercises its option, you will supply the development assets to the overseas entity.

On exercise of the option, the overseas entity must pay any outstanding milestone payments and, on receipt of the payments, you will transfer the assets to the overseas entity.

On exercise of the option, the overseas entity does not provide further consideration in addition to the exclusivity fee and milestone payments. Therefore, your supply of a project to the overseas entity when they exercise the option is not a taxable supply nor is it GST-free because paragraph (a) of section 9-5 is not satisfied.