Edited version of private advice

Authorisation Number: 1051610249043

Date of advice: 10 December 2019

Ruling

Subject: Goods and services tax and development leases

Question

Did 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 for Sale, Project Delivery Agreement and the executed Crown Lease (collectively referred to as the Transaction Documents) on the Land?

Answer

No

Question

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

This ruling applies for the following period:

YYYY to YYYY

The scheme commences on:

YYYY

Relevant facts and circumstances

Entity A entered into a contract for the grant of 99 year Crown Leases for the Land from the relevant authority (Contract).

Contract of Sale

Under the Contract, the relevant authority agreed to grant, or procure the grant, of Crown Leases to Entity A on completion of the Contract on substantially the same terms and conditions of the Specimen Leases attached to the Contract.

Completion of the Contract occurred, at which time Crown Leases were granted over the Land.

The Contract is contingent upon the relevant authority and Entity A entering into the Project Delivery Agreement (PDA)

Entity A must comply with all its obligations under the PDA and must not sell the Land or permit any transfer of the Land to be registered until it has complied with all of its obligations under the PDA.

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

Project Delivery Agreement (PDA)

The PDA was entered into simultaneously with the Contract. The PDA includes guidelines which outlines the intended Design and Development Outcomes for the Land and provides a framework for development of the development sites.

Design Guidelines

The design guidelines form part of the PDA and provide a framework for development on the site.

The Design Guidelines set out the Project Overview, various Objectives and details with respect to the Planning Principles.

Crown Leases

The terms of the Crown Leases are applicable to all Blocks.

The Crown Leases are market value leases.

The key terms of the Crown Leases are:

Term: 99 years.

Entity A is required to pay rent of 5 cents per annum.

The Crown Lease provides that the land may be used for the purpose of single dwelling housing.

Entity A must undertake the following:

(a) complete, within X months from the Lease Commencement Date, construction of an approved development as approved by the relevant authority.

(b) and also;

(i) ensure that facilities for electrical and telephone cables are installed underground to a standard acceptable

(ii) preserve all trees on the land that have been identified for retention in the development approval

(iii) maintain repair and keep in repair the premises; and

(iv) keep the premises clean, tidy and free from rubbish and other matter.

The Crown Lease may be terminated in certain circumstances.

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

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

·        you make the supply for consideration

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

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

·        you are registered or required to be registered.

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

Supply

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

·        a supply of goods.

·        a supply of services.

·        an entry into an obligation to do anything.

Characterising the supply

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

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

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

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

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

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

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

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

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

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

It is a normal obligation of a lessee under a Crown Lease to carry out development works within a specified timeframe.

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 99 years and is renewable at no cost. 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 authority.

Stamp Duty was paid on the basis of the total consideration paid for the grant of the 99 year lease.

As with any Crown Lease, there are obligations about how the land could be used for the benefit of Entity A 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 the fact that it acquired the lease for consideration. 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 broader land development policy of ensuring timely and orderly development of the area and to avoid land-banking by developers.

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

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

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

The government does not derive any economic benefit from the development being built on the land other than having the relevant land developed in a manner consistent with policy and design guidelines. Only Entity A is able to sell dwellings contained on the land.

Entity A is required to provide and maintain additional site works under the Crown Lease. These additional site works can only be provided on the site after Entity A is already the lessee under the Crown Lease. Entity A does not receive any further supply of anything from the relevant authority after completion of these works.

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 government. 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 authority.

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

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 and

(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 has entered into a Contract for the grant of a 99 year Crown Lease - being a market value lease.

Having paid the balance of the purchase price, Entity A was granted Crown Leases over the Land.

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

1.   The dwellings constructed on the land

2.   Additional site works which Entity A is required to provide, maintain and implement under the Crown Lease

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

Further, 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 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 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 5c per annum. The lease will continue for 99 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.