Edited version of private advice

Authorisation Number: 1051702080272

Date of advice: 19 June 2020

Ruling

Subject: Development leases

Question 1

Is Entity A making 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 government agency 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 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 taxable supply of the Land by the relevant government agency under section 9-5 of the GST Act to Entity A?

Answer

No

Question 3

On what basis can the value of the non-monetary consideration provided by Entity A be determined?

Answer

Not applicable

Relevant facts and circumstances

Entity A is an Australian Proprietary Company that was established on ddxxyyyy and has been registered for GST from ddxxyyyy.

On ddxxyyyy, Entity A entered into a contract for the grant of a 99 year Crown Lease for the Land from the relevant government agency (Contract). Settlement occurred on ddxxyyyy.

The Contract, Crown Lease and the PDA (including the Housing Development Guide) (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. The relevant clauses in the Transaction Documents are outlined below.

Contract of sale

Under the Contract the relevant government agency agreed to grant, or procure the grant of, a 99 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 was $X (including any GST payable). The supply was made under the margin scheme, per the Contract Schedule. Settlement occurred on xxyyyy, at which time the relevant authority was required to grant a Crown Lease over the Land to Entity A.

The Contract is contingent upon the relevant government agency and Entity A entering into the Project Delivery Agreement (PDA) prior to or at the same time they entered into the Contract. Clause 37 of the Special Conditions (Annexure A) concerns the PDA and the Security. In particular:

A.    Entity A must comply with all of its obligations under the PDA.

B.    Entity A is restricted from dealing with the land until it has complied with its obligations under the PDA.

C.   Entity A must not complete any agreement for the sale of land or permit any transfer of the land to be registered until it has complied with all of its obligations under the PDA.

D.   Entity A acknowledges and agrees that the relevant government agency may retain and use the Security in respect of its obligations under the Contract and the PDA. The Security is set at X% of the Contract Price. This amount is agreed to be security for the performance by Entity A of its obligations under the Contract and PDA.

E.    The relevant government agency may register a charge or caveat over the Crown Lease, provided that the caveat does not prevent Entity A from registering a mortgage in respect of the Lease.

F.    The charge and any associated caveat must be withdrawn once Entity A has complied with all obligations under the Contract and PDA and Entity A requests the relevant government agency to withdraw the caveat.

Clause X of the Special Conditions (Annexure A,) is with respect to GST. In particular:

A.    Entity A and the relevant government agency acknowledge and agree that the Buyer's works are consideration provided by Entity A for the grant of the Crown Lease and the Buyers Works are a taxable supply made by Entity A.

B.    To the extent that the consideration for the grant of the Crown Lease is a taxable supply made by Entity A, Entity A and the relevant government agency acknowledge that:

a.   The value of the consideration that is a taxable supply provided by Entity A is equal to the value of the Lease less the Price;

b.   The value of the consideration that is a taxable supply provided by Entity A is equal to the cost to Entity A of that consideration (less any amounts in respect of GST for which Entity A is entitled to an input tax credit), reasonably determined by Entity A and set out in a tax invoice required to be issued by Entity A under the Contract; and

c.   Entity A must issue to the relevant government agency a tax invoice for the consideration that is a taxable supply by Entity A on Completion.

For the purpose of this ruling, the term Buyers Works and Development Works are considered to be interchangeable terms.

The Annexures attached to the Contract are:

·         Annexure A - Special Conditions

·         Annexure B - Specimen Lease

·         Annexure C - Project Delivery Agreement

·         Annexure D - Deposited Plan

·         Annexure E - Clearance Certificate

Annexure C: Project Delivery Agreement (PDA)

·         Clause X of the Background provides that the Developer will, in developing the Land, comply with the Developer's obligations set out in the PDA including in respect of the design, construction, marketing and sale of Affordable Housing on the Land.

·         Clause X of the Background provides that, as part of its requirement to meet the affordable housing requirements, the relevant government agency offered the Land for sale on the basis that at least the Minimum Number of Affordable Housing Dwellings would be offered for sale on the Land.

·         Clause X provides that the Developer entered into the Contract for Sale acknowledging the requirement to construct and sell at least the Minimum Number of Affordable Housing Dwellings on the Land.

·         Clause X of the PDA specifies that it remains in force until the parties have complied with all of their obligations under the Agreement or 10 years following commencement of the PDA (whichever is the earlier).

·         Clause X of the PDA outlines the Minimum Number of Affordable Housing Dwellings and states that Entity A must offer for sale a number of Affordable Housing Dwellings which is not less than the Minimum Number of Affordable Housing Dwellings constructed (or to be constructed) on the Land during the term of the Agreement. The minimum number of Affordable Housing Dwellings is stated as X. Where Entity A has failed to comply with obligations under clause x, the relevant government agency may impose restrictions or prohibitions on the participation of the developer, an 'associated entity' and any other party in any future offerings of land, for up to x years from the date of notification to the Developer of the restriction or prohibition.

·         Clause x of the PDA sets out Entity A's obligations with respect to the Sale of Affordable Housing.

·         The PDA further sets out steps required to obtain development approval, including the relevant government agency endorsement of the Development Application/s and consultation required between Entity A and the relevant government agency. It also sets out mechanisms to protect property, such as the verges and footpaths during development and conditions on the sale of the property.

·         Entity A must complete the construction of the dwellings on the Land and obtain a Certificate of Compliance in respect of each Crown Lease within x months after completion.

·         Security is also required for the performance of Entity A's obligations under the PDA, in the form of an unconditional irrevocable bank guarantee (without expiry date) from an Australian financial institution and in other terms reasonably required by the relevant government agency or a bank cheque in favour of the relevant government agency. The security is in the amount of X% of the Contract price. If Entity A breaches its obligations, the relevant government agency may remedy the breach and call on the security for all costs incurred to remedy the breach. Only upon completion of its obligations under the PDA will Entity A be able to retain its security amount. Further, Entity A must demonstrate that it has complied with its obligations with respect to the sale of Affordable Housing.

·         Entity A further indemnifies the relevant government agency from any claim, expense, loss or damage suffered by the relevant government agency arising out of a failure by Entity A to duly and punctually perform its obligations under the PDA.

·         The PDA contains a GST 'gross-up' clause, which requires a recipient of a taxable supply to pay to the supplier the amount of GST in respect of the taxable supply (unless the taxable supply is expressly stated to be GST inclusive). If the amount paid by Entity A to the relevant government agency is more or less than the GST on the taxable supply, then the supplier shall refund, or the receiver will pay the deficiency, with respect to the GST. Any amounts of GST only need to be paid when a tax invoice has been issued in respect of the taxable supply.

Crown Lease

The Crown Lease is a market value lease.

The key terms of the Crown Lease are:

·         It commenced on xxyyyy.

·         The term is for 99 years.

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

·         The lease provides that the land may be used for a purpose.

·         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. The development must be 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, to an acceptable standard and in accordance with previously submitted and approved plans and specifications, namely:

- hydraulic mains, stormwater drains, sewer lines, hydraulic fire mains and hydrants

- storage areas, covered parking, hardstanding carparking, adequately illuminated vehicle access roads, pedestrian pathways and vehicle access drives

- facilities to enable electrical and telephone cables and wires to be installed underground

- landscaping

(c)          and also;

(i) preserve all trees on the land that have been identified for retention in the development approval or to which the relevant Act applies, unless the Government consents to their removal

(ii) screen and keep screened all service areas and ensure all plant and machinery is suitably screened from public view

(iii) only erect buildings or make structural alterations to any building with the Authority's written approval

(iv) Maintain repair and keep in repair the premises to the satisfaction of the relevant Authority.

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) to (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 remains unpaid for three months after the appointed payment date.

-        Entity A fails to complete an approved development within the timeframe specified, being x months from the commencement of the Crown Lease.

-        After completion of the approved development, the land is not used for an approved purpose for at least one year.

-        Entity A fails to observe or perform any other covenants contained in the Crown Lease and fails to remedy such breach within six months after the relevant Authority serves Entity A with written notice of the breach.

Subject to Entity A paying all money required to be paid under the provisions of the relevant Act, 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 has obtained development approval.

The expected cost of construction is an estimated $X.

Entity A will register with the relevant Authority its Unit Titles Application Request (UTAR).

Entity A will lodge the approved unit title application with the relevant body.

Once the relevant body registers the original Units Plan, the Crown Lease will automatically be ended. Entity A will then become the holder of an estate in leasehold in each unit for the same term as the original Crown Lease (referred to as a Unit Title Lease).

Other documents provided

Stamp Duty Notice of Assessment outlining the amount of stamp duty paid, calculated on a value of $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 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; and

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

·         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 or 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 or 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 or 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 99 years and is renewable at no cost. It is the most extensive interest in land that can be held in the relevant State or Territory, with the Commonwealth holding the reversion. The Commonwealth 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 (see the relevant Act). 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 or 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 99 year lease - a market value lease - was $XX. The cost of construction was $X.

The anticipated cost of the development you plan to complete is $X.

As with any Crown Lease in the relevant State or Territory, 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 that it 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 government agency that the approved development will be completed in X months is primarily concerned with the timing of the completion of the development. It is designed to encourage compliance with the relevant State or Territory Government's broader land development policy of ensuring timely and orderly development of the area and to operate as a deterrent to land speculation in the relevant State or Territory.

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 it was aware of these. This prevents you 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 a the relevant State or Territory's policy outcome rather than the provision to the relevant State or 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 or 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 or 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 constructed 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 Entity A is already the lessee under the Crown Lease. Entity A does not receive any further supply of anything from the relevant government agency after completion of these works.

For completeness we note that, although special condition X provides that you and the relevant government agency agree that the Buyers Works are consideration provided by the Buyer for the grant of the 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 Transaction Documents does not result in Entity A making a supply to the relevant government agency. 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 or Territory. The development works do not benefit the relevant government agency, 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 or Territory or the relevant government agency.

In the absence of a supply from Entity A to the relevant government agency 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.

Consideration, for a supply or acquisition, means any consideration in connection with the supply or acquisition. Consideration for a supply is something the supplier receives for making the supply. Non-monetary consideration, such as the provision of works, can constitute consideration for GST purposes.

The issue in these circumstances is whether the building works and the associated site works are for or 'in connection with' the supply of the Crown Lease by the relevant government agency. This is determined by considering whether there is sufficient nexus between the supply and the payment.

However, a supply needs to be established before a question of nexus becomes relevant. There is no need to consider if the requisite nexus exists if there is no supply of works made by the developer to the relevant government agency.

As set out in the response to Question 1, there is not a supply of development works by Entity A to the relevant government agency and therefore the development works undertaken by Entity A are not non-monetary consideration for the taxable supply of the land by the relevant government agency.