Edited version of private advice

Authorisation Number: 1051714272231

Date of advice: 09 July 2020

Ruling

Subject: Periodic supply of leasehold interest.

Question 1

Is GST payable by the Partnership on the GST exclusive payments of $X for which invoices were issued on X and the GST exclusive balance payment of $X payable on or before X for the lease of the Property under the Lease Agreements (as those terms are defined below) attributable under the special rules in Division 156 of the GST Act?

Answer 1

Yes

Question 2

If the Commissioner's answer to Question One is 'No' and the attribution of the GST payable on the supply of the Lease resulted in a GST error, will the Commissioner make a determination under section 17-20 of the GST Act that a 'net amount' for a later 'tax period' may be worked out to take into account the correction of the GST error?

Answer 2

N/A

Relevant facts and circumstances

You, the Partnership, are registered for GST and account for GST on a non cash basis.

Entity B is the Nominee for the Partnership.

Through the Nominee, you are the registered proprietor of:

• the land shown as lot X on proposed plan of subdivision X and comprised in the Certificate of Title volume X folio X (Lot X); and
• the land shown as lot Y on proposed plan of subdivision Y and comprised in the Certificate of Title volume Y folio Y (Lot Y),

(together Lot X and Lot Y are 'the Property').

On or about X you (as landlord), Y Pty Ltd (Y) (as tenant) and Z Limited (as guarantor) entered into the 'Put and Call Option Deed (Lease) (Lease Option Deed) under which:

• you agreed to grant to Y a call option to lease the Property to Y on the terms and conditions set out in the Lease Option Deed (Lease Call Option);
• Y agreed to grant to you a put option to require you to lease the Property to Y on the terms and conditions set out in the Lease Option Deed (Lease Put Option); and
• an amount of $X (plus GST) titled as 'Initial Payment' was payable to you (Initial Payment).
• Y and a third party entity unrelated to Y (Third Party Builder) entered into the 'Put and Call Option Deed (Development Agreement) (DA Option Deed) under which:
• the Third Party Builder agreed to grant to Y a call option to enter into a development agreement in relation to the Property on the terms and conditions set out in the DA Option Deed (DA Call Option); and
• Y agreed to grant to the Third Party Builder a put option to require Y to enter into a development agreement in respect of the Property on the terms and conditions set out in the DA Option Deed (Put Option).
• Pursuant to clause X of the Lease Option Deed, you were required before the 'Option Termination Date' of X to procure a 'subdivision permit' required for the plan of subdivision in respect of the Property (Subdivision Permit).
• The Subdivision Permit was granted on X.
• On or about X you issued an invoice to Y in respect of the Initial Payment (plus GST).
• On or about X Y paid the Initial Payment (plus GST) to you pursuant to the terms of the Lease Option Deed.

The GST in respect of the Initial Payment in relation to the Put and Call Option was subsequently reported in your GST return for the relevant tax period.

On or about mmyyyy:

• Y exercised the Lease Call Option and the DA Call Option;
• a development agreement was entered into in respect of the Property between Y and the Third Party Builder on the terms and conditions set out in the DA Option Deed (Development Agreement); and
• a 'Lease of Real Estate' was entered into in respect of Lot X (Lot X Lease Agreement) and Lot Y (Lot Y Lease Agreement) on the terms and conditions set out in the Lease Option Deed (together the Lot X Lease and the Lot Y Lease are 'the Lease Agreements').

Under the terms of the Development Agreement, Y has the right to engage the Third Party Builder in relation to the construction of improvements on the Property.

The Lease Agreements are for a commercial property, not a residential property. Y trades primarily in the retail and office sector.

Broadly, the Lease Agreements provide for two payments on each lease which are to cover the full 199 year duration of the leases for Lot X and Lot Y, namely:

The Deposit

·         $X (plus GST) in respect of the Lot X Lease Agreement; and

·         $Y (plus GST) in respect of the Lot Y Lease Agreement.

The Balance Payment

·      $X (plus GST) in respect of the Lot X Lease Agreement; and

·      $Y (plus GST) in respect of the Lot Y Lease Agreement.

Specifically, under the terms of the Lease Agreements:

• Lot X and Lot Y were leased by you to Y for a term of 199 years starting on X (Commencement Date) and expiring on Y (Expiration Date);
• You granted to Y a call option to purchase the relevant premises in respect of the Property on the terms and conditions set out in the Lease Agreements (Property Call Option);
• Y granted to you a put option to require Y to purchase the relevant premises in respect of the Property on the terms and conditions set out in the Lease Agreements (Property Put Option);
• An amount of $X (plus GST) titled as 'Rent' (Rent) is payable at the end of the term of the Lease Agreements if demanded by you;
• An amount titled a 'Deposit' (Deposit) is payable by Y to you on the Commencement Date being:

·         $X (plus GST) in respect of the Lot X Lease Agreement; and

·         $Y (plus GST) in respect of the Lot Y Lease Agreement.

• pursuant to 'additional provision' X at item Y of the Schedule to the Lease Agreements:

·         for the period specified at X at item Y of the Schedule to the Lease Agreements you must procure the Deposit to be held by your solicitors on trust for you and Y and the Deposit may not be released to either you or GPT except under the terms set out in 'additional provision' X at item Y of the Schedule to the Lease Agreements;

·         the Deposit held by your solicitors on trust for you and Y can be invested with an authorised deposit taking institution under the Banking Act 1959 (Cth) in an interest bearing account (Investment Account) pursuant to the terms set out at 'additional provision X at item Y of the Schedule to the Lease Agreements.

• an amount titled a 'Balance Payment' (Balance Payment) is payable by Y to you on the 'Prescribed Date' being:

·      $X (plus GST) in respect of the Lot X Lease Agreement; and

·      $Y (plus GST) in respect of the Lot Y Lease Agreement.

The 'Prescribed Date' is the later of:

• X; and
• The earliest of:

·      the due date for settlement under the 'Sale Contract';

·      Y; and

·      the date (as is agreed by the parties acting reasonably) that you have done everything that needs to be done by you on the relevant premises and on the surrounding land to enable construction and occupation of any buildings constructed, or to be constructed, on the relevant premises.

On X you issued the following two GST inclusive invoices to Z Limited ATF W Trust:

• Invoice No. X - Invoice Total $X (GST:$X) [Description: 'Deposit under Lease of Lot X at X]; and
• Invoice No. Y - Invoice Total $Y (GST:$Y) [Description: 'Deposit under Lease of Lot Y at Y]

The Deposit was deposited into your solicitor's trust account on or about X pursuant to 'additional provision' X at item Y of the Schedule to the Lease Agreements.

On or about X, the Deposit was subsequently invested into a 'controlled money account' (i.e. the Investment Account pursuant to 'additional provision' X at item Y of the Schedule to the Lease Agreements

The amount of $X (representative of the GST component of the Deposit) was released from the 'controlled money account' on or about X (i.e. pursuant to the 'additional provision' X at item Y of the Schedule to the Lease Agreements

As at the date of this ruling, the balance of the Deposit remains in the controlled money account and has not been released.

As at the date of this ruling, Y has not exercised its option to purchase the Property and title remains unchanged.

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 29-5

A New Tax System (Goods and Services Tax) Act 1999, section 29-39

A New Tax System (Goods and Services Tax) Act 1999, section 156-5

A New Tax System (Goods and Services Tax) Act 1999, section 156-22

A New Tax System (Goods and Services Tax) Act 1999, section 195-1

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 (Australia); and

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

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

Applying the above to your two 199 year leases:

• the leasehold supplies you provide to GPT are for consideration;
• the supplies are made in the course of a leasing enterprise that you carry on;
• the Property is located in Australia;
• you are registered for GST; and
• they are not GST-free or input taxed supplies of residential accommodation.

Therefore, the leasehold supplies you make are taxable.

Attribution

Under section 29-5, the GST payable by an entity on a taxable supply is attributable to:

• the tax period in which any of the consideration is received; or
• if, before any of the consideration is received, an invoice is issued relating to the supply, the tax period in which the invoice is issued.

However, section 29-39 provides that there are special rules relating to the attribution rules, including Division 156.

Section 156-5 provides:

(1)   The GST payable by you on a taxable supply that is made:

(a)   for a period or progressive basis; and

(b)   for consideration that is to be provided on a progressive or periodic basis;

is attributable, in accordance with section 29-5, as if each progressive or periodic of the supply were a separate supply.

(2)   If the progressive or periodic components of such a supply are not readily identifiable, the components correspond to the proportion of the total consideration for the supply that the separate amounts of consideration represent.

Further, section 156-22 provides:

For the purposes of this Division, a supply or acquisition by way of lease, hire or similar arrangement is to be treated as a supply or acquisition that is made on a progressive or periodic basis, for the period of the lease, hire or arrangement.

Meaning of 'Progressive' or 'Periodic'

The Lease Agreements provide for two payments on each lease which are to cover the full 199 year duration of the leases for Lot X and Lot Y, namely:

The Deposit

·         $X (plus GST) in respect of the Lot X Lease Agreement; and

·         $Y (plus GST) in respect of the Lot Y Lease Agreement.

The Balance

·      $X (plus GST) in respect of the Lot X Lease Agreement; and

·      $Y (plus GST) in respect of the Lot Y Lease Agreement.

You have provided 2 invoices which you issued to GPT on X for the following (GST inclusive) amounts:

• $X;
• $Y

The funds provided by Y are held on trust by your solicitors for yourself and Y, with only amounts for GST being released. Rent payments will not be released periodically over the 199 year period but are 'up front'.

The question to be determined is whether the above payments by Y to you can be construed as rent for supplies of leasehold interests provided on a "progressive or periodic basis" over a period of 199 years.

Goods and Services Tax Ruling 2000/35 (Division 156 - supplies and acquisitions made on a progressive or periodic basis) (GSTR 2000/35) discusses what would constitute a lease provided on a "progressive or periodic basis".

Paragraph 19 of GSTR 2003/35 states:

19. Supplies may be made for a period or on a progressive basis; the consideration may be made on a progressive or periodic basis. There is no requirement in Division 156 that the way in which consideration is provided must correspond to the way in which the supply or acquisition is made: for example, supply on a progressive basis can be made with periodic payments.

Applying the above to your situation, there is no requirement for the rent payments to be spaced out over the full 199 year terms of the leases.

In addition, paragraph 95 of GSTR 2000/35 discusses advance payments:

95. Where an advance payment is the first of a series of payments for a supply or acquisition for a period or on a progressive basis, attribution of the GST payable and input tax credits will be in accordance with Division 156.

Paragraph 25 provides the following in regard to supplies:

25. A supply or acquisition you make is for a period when it is made over a specified length of time or for a time with an identifiable end point. This may be stated in your contract, agreement or other similar document. However, a supply will not be for a period merely because there is a stipulated completion date.

We consider that the supply of the lease is made for a specified period with an identifiable end point.

Paragraph 29 provides the following description of when a payment is made on a periodic basis.

29. You provide consideration on a periodic basis when it is made in equal or unequal instalments provided upon expiration of specified periods. An example of consideration on a periodic basis is where payments are made monthly under an agreement to lease a building.

We consider that the payments are made on a periodic basis

'Attachment A' to GSTR 2000/35 provides a series of questions to determine whether Division 156 applies. Applying each of those questions to your situation the decision tree provides that Division 156 applies to your arrangement

Based on considerations of all the above, we are of the view that the payments made by Y to you fall within Division 156 and are attributable in accordance with section 29-5 as if each periodic component of the supply were a separate supply. Therefore you have correctly attributed the Deposit and will be required to remit the GST payable on the Balance Payment on or before X.

Question 2

It is not necessary to address question 2.