Edited version of private advice

Authorisation Number: 1051648655666

Date of advice: 31 March 2020

Ruling

Subject: GST and a real property transaction

Question 1

If the Nominee purchases the two properties by exercising the call options under the Nomination Deed will those acquisitions be creditable acquisitions under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999(GST Act)?

Answer 1

No. The supplies will not be creditable acquisitions of residential premises.

Question 2

Will the Nomination Fees paid by the Nominee also be creditable acquisitions?

Answer 2

No. The nomination fees will not be creditable acquisitions under Division 11 the GST Act as the supply to the Nominee is input taxed.

Question 3

Will the reimbursement and payment of the Call Option Fees the Nominee pays under the Deed of Nomination to the Nominator be a creditable acquisition?

Answer 3

No. The nomination fees will not be creditable acquisitions under Division 11 the GST Act as the supply to the Nominee is input taxed.

Question 4

Will the Uplift Fees the Nominee pays be a creditable acquisition by the Nominee and a taxable supply by The Nominator?

Answer 4

Yes. The requirements of a creditable acquisition are met as Nominator is making a taxable supply.

Question 5

Will the Reimbursement Expenses the Nominee pays under the Nomination Deed creditable acquisitions?

Answer 5

Yes. The requirements of a creditable acquisition are met.

This ruling applies for the following periods:

From the tax period commencing 1 July 2018 onwards.

Relevant facts and circumstances

1.    The parties to the contract are registered for GST.

2.    The Nominator and the Nominee made a joint application for a ruling

3.    On x date a Call Option Deed was entered into between a property owner as the grantor and supplier as the grantee.

4.    The call option as varied by the Deed provided for:-

(a)          A call option granted to the Nominator over two properties to purchase two residential properties

(b)          The payment of a call option fee of $x for each of the said properties.

(c)          The payment by the grantee of a call option extension fee of $x.

(d)          Call Option Expiry date being x date in the 2019-2020 financial year.

(e)          The payment of a Call Option Variation Fee of $x in consideration of the Grantor entering into the Deed, the costs being apportioned to each of the properties equally.

(f)           The completion date of the contracts to purchase the above properties attached to the Deed of Variation being x date in the 2019-2020 financial year.

(g)          Under special condition of each of the sale contracts attached to the Deed of Variation the Call Option Fee amount of $x for each property and the call option variation fee being $x in relation to each property) is to be treated as part payment of the purchase price. This is the case even if the contract is rescinded or terminated per subclauses of the sale agreement in relation to the two properties.

(h)          The sale agreements for the properties indicate that the sale is not subject to GST and is an input taxed sale of residential premises.

(i)            The call options for the properties must be exercised simultaneously in order to exercise the call options.

(j)            Completion of each of the contracts for the properties under the contracts are interdependent upon completion of the other property.

5.    The properties are not new residential premises and are not commercial residential premises and at least one of the units has been leased to tenants.

6.    On x date in the 2019-2020 financial year, The Nominator entered into a Deed of Nomination (Nomination Deed) with the Nominee.

7.    Under the Nomination Deed, the Nominee:-

(a)          is enabled to exercise the call options over the properties.

(b)          agreed to pay upon entering into the Nomination Deed the sum of $x to the Nominator the following sums:-

                                          i.    Call Option Fees $x

                                         ii.    Call Option Variation Fees $x

                                        iii.    Call Option Extension Fees $x

Total $x

(c)          agreed to pay the sum of $x plus GST (if any) to the Nominator, to reimburse them for the following costs associated with a development application lodged by the Nominator for a residential re-development of the properties. The definition of 'Reimbursement Costs' is set out in the Nomination Deed.

These are collectively referred to as the 'reimbursement costs' in this ruling.

(d)          The Nomination Fee, the Option Fees and the Reimbursement Costs and the GST Component, (if any), under the Nomination Deed are payable by the Nominee as follows:

                                          i.    On the date of the Variation Deed, the sum of $x being part reimbursement of the Option Fees by way of bank cheque made payable to the Nominator and released to the Nominator;

                                         ii.    On or by the Completion Date:

The balance of the Option Fees in an amount of $x plus the Reimbursement Costs being $x by bank cheques payable to the Nominator:

The Nomination Fee of $x by bank cheque made payable to the Nominator; and

                                        iii.    The GST Component being the sum of $x by bank cheque into the trust account of the Agent subject to the GST Ruling in accordance with the agreement.

(e)          The Nominator has lodged a development application with Council for the construction of a mixed use development as varied by any condition of consent.

(f)           In addition to the above fees an Uplift Fee is payable by the Nominee to the Nominator for any gross floor area approved in the Development Consent.

The uplift fee is payable to the Nominator by the Nominee for the potential for more floor area to be realised compared with the original estimate at the lodgement of the development approval.

(g)          The CGT Component is the amount asserted by the Nominator as being payable on the Nomination Fees ($x) and the said Reimbursement Costs ($x).

8.    The Nominee proposes to exercise the call options by reason of being appointed by the Nominator under the Deed and to complete the purchases of the properties from the vendor of the real property.

9.    Immediately following completion of the said contracts the Taxpayer intends that the two houses will be let for residential accommodation as they are capable of occupation as a residence or residential accommodation.

10.  The premises are zoned residential.

Assumptions

·   The parties complete the Deed of Nomination.

·   The Nominee exercises the call options and completes the purchase of the properties.

·   The Nominee lets the properties out for residential accommodation following completion of the purchase contracts.

·   The parties are engaged in an enterprise.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-30

Section 11-5

Section 40-5

Section 40-35

Section 40-65

Section 40-75

Reasons for decisions

Detailed reasoning Question 1

In order to determine whether the Nominee is making a creditable acquisition under the nomination of the two residential properties, all of the relevant statutory requirements must be met. Section 11-5 of the GST Act sets out the requirements of a creditable acquisition:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

(d) you are registered, or required to be registered.

The Nominee stated it is buying the property to conduct an enterprise of leasing which it expects to be an input taxed activity. The GST Act, section 11-15 sets out the meaning of creditable purpose:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

(3) To the extent that an acquisition relates to making financial supplies through an enterprise, or a part of an enterprise, that you carry on outside Australia, the acquisition is not, for the purposes of paragraph (2)(a), treated as one that relates to making supplies that would be input taxed.

Purchasing property for residential leasing would not be solely or partly for a creditable purpose as the limitation provisions in subsections 11-15(2) and (3) apply.

The second requirement of a creditable acquisition is that the supply of the thing by the Nominator to the recipient, is a taxable supply. Section 9-5 of the GST Act sets out the requirements of a taxable supply. It says that you (Nominator) make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on: and

(c) the supply is connected with the indirect tax zone: and

(d) 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.

It is not in dispute that the requirements of subparagraphs 9-5 (a) to (d) are satisfied and no GST provisions in relation to GST- free supplies apply based on the facts provided. The relevant issue is whether the supplies of the properties are input taxed.

Section 9-30 of the GST Act deals with supplies that are GST free or input taxed. Specifically, subsection 9-30(2) states that a supply is input taxed if:

(a)                 it is input taxed under Division 40 or under a provision of another Act; or

(b)                it is a supply of a right to receive a supply that would be input taxed under paragraph (a).

Sales of 'residential premises' is considered under section 40-65 of the GST Act and rental of residential premises is dealt with in section 40-35. Both sales and rentals of residential premises are input taxed but only to the extent that they are to be used predominantly for residential accommodation and are not new residential premises or commercial residential premises.

Section 195 of the GST Act defines "residential premises" to mean:

land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises considers at paragraph 9 that:

residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

The facts exclude the properties as commercial residential premises and they are also not 'new residential premises' as defined under 40-75 of the GST Act.

The Nominee advised that the properties are both intended and capable of being occupied and the Nominee intends to rent them out short term once the purchase completes in x date. It is notable that the term of occupation is not a relevant consideration. The premises are fit for human habitation and appropriately zoned as residential.

The supply, should it proceed, will be a supply of input taxed residential premises if it remains in the same state and configuration as it currently stands.

Detailed reasoning Question 2

As with question one above, the issue is whether the acquisition the Nominee makes is a creditable acquisition. This in turn hinges on whether the supply to it is a taxable supply. The acquisition in question is the right to acquire the residential properties via the payment of the nomination fee which is defined in the Nomination Deed.

The Nomination Deed also defines GST component.

The supply the Nominator makes under the nomination deed is best characterised as a right to acquire residential premises. It is not a separate supply but rather is further consideration for that right.

Subsection 9-30(2) states:

A supply is input taxed if:

(a) it is input taxed under Division 40 or under a provision of another Act; or

(b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a).

As discussed above, the acquisition is of residential premises which are input taxed under Division 40. Additionally, the acquisition under the Nomination Deed relates to a right to receive an input taxed supply of residential premises and consequently the grant of the right by the Nominator would also be input taxed.

In this way the acquisition the Nominee makes is not a creditable acquisition as the Nominator has made an input taxed supply of the right to acquire the residential premises.

Detailed reasoning Question 3

The fees related to the call option are set out in the facts.

The Nominee is ultimately acquiring the right to acquire the residential properties. Under the Nomination Deed, it is required to reimburse the supplier for the call option fees and related fees it paid to the current owner of the residential properties.

The call option related fees maintain the original character of an input taxed supply. That is, the Nominee is acquiring a right to receive a supply that would be input taxed under Division 40.

ATO ID 2005/183 Goods and Services Tax GST and supply of a call option over residential premises explains that the grant of a right is in these circumstances is a financial supply under section 40-5 and it is also an input taxed supply under paragraph 9-30(2)(b).

The Nominee would be receiving in these circumstances, a supply from the Nominator that is wholly input taxed. Consequently, the supply to the Nominee not being taxable, in line with the reasoning in the above two questions, is not a creditable acquisition.

Detailed reasoning Question 4

The uplift fees (payable by the Nominee to the Nominator) are specifically defined in the nomination deed.

The uplift fee is payable to the Nominator by the Nominee to cover the Nominator for the potential for more floor area to be realised compared with the original estimate at the lodgement of the development approval. This amount was secured via funds in trust. The final amount payable has fallen to $x as less floor area was realised.

This amount currently standing at approximately $x is compensatory to the extent that the development may potentially realise more or less floor area depending on the outcome of the Development Approval. Analysis must focus on the nexus between an identified supply and the consideration for it. This is discussed in a number of GST Rulings including Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements paragraphs 80-96. Importantly it states at paragraph 96:

In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

The supply is related to the future value of the land. It is not related directly to an input taxed supply of residential premises and is better characterised as a payment for the increased value of the land when the new units are constructed on the land. As the supply is not directly linked to an input taxed supply, we must determine whether this supply is taxable for the Nominator and whether the Nominee has made a creditable acquisition of land.

To determine if it was a taxable supply to the Nominee we need to consider the operation of section 9-5.

The Nominator will provide $x consideration for this supply. It will acquire from an entity that is engaged in an enterprise, the land is connected with the indirect tax zone (Australia) and it is registered for GST. The supply is not input taxed as discussed above. Further, the supply is not GST free under any provisions in Division 38.

On this basis the supply is for consideration and is a taxable supply by the Nominator and a creditable acquisition by the Nominee.

Detailed reasoning Question 5

The facts indicate that the Nominator paid a number of fees that were charged in the process of pursuing the development approval of the land. These charges are listed in the facts

In the Nomination Deed, the Nominator, sought recovery of those fees as a reimbursement.

These reimbursement fees where supplied in the course of the parties' respective enterprises and, where the abovementioned requirements of section 9-5 are met, are taxable supplies made by the supplier. GST is a transactional tax at each point in the chain of supplies. For example, if the architect made a taxable supply to the Nominator, it would then seek an input tax credit for the GST it paid and reports the GST when it on-supplies that intellectual property to the Nominee. Any subsequent supplies to the Nominee are taxable even where the Nominator may have received them without any GST in the price as the correct analysis requires the supply by the Nominator to the Nominee be analysed under the Nomination Deed.

In each instance the Nominee is making a creditable acquisition of the reimbursement expenses as it satisfies the requirements under section 11-5.