Edited version of private advice

Authorisation Number: 1051786078641

Date of advice: 30 November 2020

Ruling

Subject: GST and long-term leases

Question 1

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 government agency in completing development works pursuant to the Contract for Sale, Project Delivery Agreement and executed Crown Lease (collectively referred to as the Transaction Documents) on the Land?

Answer

No

Question 2

Were 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

Relevant facts and circumstances

Entity A is a privately owned company, incorporated and registered.

Entity A registered for GST from xxyyyy and carries on a business of property development.

On xxyyyy, Entity A entered into a Contract of Sale (the Contract) for the grant of a Crown lease for the Land from the relevant government agency.

Under the Contract, the relevant government agency agreed to grant a Crown Lease to Entity A on Completion of the Contract on substantially the same terms as the Specimen Lease annexed to the Estate Guide, which forms part of the Project Delivery Agreement (PDA).

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 upon completion of the Contract.

On xxyyyy, the relevant government agency granted a Crown Lease over the Land to Entity A. The Crown Lease were granted on substantially the same terms as the Specimen Lease attached as Attachment X to the Estate Guide (which is, in turn, Annexure X to the PDA).

The purchase price stated in the contract was $X (including any GST payable). The supply of the Land was made under the margin scheme. Further, the relevant government agency warrants that it can use the margin scheme and promises that it will.

Following completion of the Contract, a Crown Lease was granted on xxyyyy.

Under Clause x of the Contract, Entity A was required to comply with the Estate Guide and acknowledged, by execution of the Contract, having read and understood its contents.

Clause X is with respect to the PDA and the Security. In particular:

•         Entity A and the relevant government agency entered into a PDA, with effect from the making of the Contract.

•         Entity A must comply with all of its obligations under the PDA including but not limited to its obligations in respect of the Estate Guide.

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

•         Entity A may 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.

•         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. With reference to the PDA, the Security is set at x% of the Contract price (as noted in the definition of Security Amount in the PDA). This amount is agreed to be security for the performance by Entity A of its obligations under the Contract and PDA.

•         Entity A charges in favour of the relevant government agency the whole of its interest in the Land and Crown Lease as security for Entity A's performance of its obligations under the Contract and the PDA.

•         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. The charge must be released 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.

Further, Entity A acknowledges and agrees that it must develop the land in compliance with the PDA, the Estate Guide and plans endorsed by the relevant government agency.

Subject to Entity A having complied with its relevant obligations of the Contract and under the PDA in respect of Entity A's plans and specifications, the relevant government agency shall consent to Entity A lodging its development application in respect of the Land with the relevant authority prior to Completion.

Stamp duty of $x was paid on xxyyyy and calculated on the purchase price stated in the Contract of $x.

Annexure C: Project Delivery Agreement (PDA)

The PDA was entered into on the same date as the Contract, being xxyyyy.

Clause x states that the relevant government agency and the Developer have entered into the Contract for Sale.

Clause x states that the relevant government agency and the Developer have agreed that the Land will be developed in the manner set out in the PDA and the Contract for Sale.

Clause x states that the Developer is to provide a bond or guarantee as security for the performance of its obligations under the PDA, including in respect of the Estate Guide.

The PDA essentially outlines the manner in which the land will be developed providing development guidelines, procedures for the relevant government agency endorsement of initial and subsequent development applications, and consultation requirements.

Clause x of the PDA imposed sustainability requirements on the buildings erected on the Land by Entity A. A sustainability report was prepared by a sustainability expert for the Land on xxyyyy. This was then provided to the relevant government agency to request for the release of the security bond.

Clause x of the PDA is with respect to the Affordable Housing. In particular, clause x of the PDA provides that Entity A is required to sell not less than x% of all dwellings erected on the Land as Affordable Housing.

Clause x of the PDA specifies that Entity A must, within x months after completion of the Contract, commence construction of dwellings on the Land in accordance with the Development Application/s (DA) endorsed by the relevant government agency and, within x months after completion of the Contract, complete construction of dwellings on the Land in accordance with the DA and obtain a Compliance Certificate. Security is also required for the performance of Entity A's obligations under the PDA and the Contract, in the form of a bank guarantee or cash security, in the amount of x% of the Contract price (cl x read with the definition of security amount). If Entity A breaches its obligations under the PDA, the relevant government agency may call on the Security. The Security will be released to Entity A following completion of Entity A's obligations.

Entity A is prohibited from selling or assigning any interest in the Crown Lease or Land to any person before the Release Date (i.e. the date on which the relevant government entity is required to release the Security under cl x) unless certain conditions are satisfied. Further, Entity A may only enter into contracts for sale before the Release Date in respect of development it proposes to construct on the Land provided that no such sales may be completed unless and until Entity A has complied with all of its obligations under the PDA.

Entity A indemnifies the relevant government agency against any 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 supply (unless the 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 that supply.

Estate Guide

The purpose of the Estate Guide is to provide further conditions for the development of blocks within Stages of the Estate.

The Estate Guide states that it should be read in conjunction with the Contract and all applicable laws including certain reference material contained therein.

The Estate Guide provides for the following:

•         Standard servicing conditions and advice.

•         Block specific requirements, including a Block Schedule.

•         Sustainability and Design Controls requirements.

•         Specific requirements with respect to affordable housing.

•         Estate Development Plan, which specifies that a minimum of x dwellings and a maximum of x dwellings can be developed on the Site.

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 x years.

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

•         Clause x outlines the purpose for which the premises may be lawfully used, being multi-unit housing of not less than x dwellings and not more than x dwellings.

•         Entity A must undertake the following:

(a)    commence, within x months from the date of commencement of the lease (or such further time approved by the relevant government agency in writing), construction of an approved development on the Land in accordance with plan and specifications prepared by Entity A and previously submitted to and approved in writing by the relevant government agency;

complete, within x months from the lease Commencement Date (or such further time approved by the relevant government agency in writing), construction of an approved development on the land in accordance with said plans and specifications and in accordance with every Statute, Ordinance or Regulation applicable to such development;

(b)                   provide and thereafter maintain certain works on the land, in accordance with

previously submitted and approved plans and specifications, namely:

(i)    hydraulic mains, storm water drains, sewer lines, hydraulic fire main and hydrants

(ii)  storage areas, covered carparking, hardstanding carparking, adequately illuminated vehicle access roads, pedestrian pathways and vehicle access drives

(iii) landscaping

(c)    and, also:

(i)  provide facilities to enable electrical and telephone cables and wires to be installed underground

(ii) preserve all trees on the land that have been identified for retention in the development approval unless the relevant government agency consents to their removal

(iii) screen and keep screened all services areas to the relevant government entity's satisfaction and ensure all plant and machinery is suitably screened from public view

(iv) only erect buildings or make structural alterations to any building with the relevant government entity's written approval.

(v) maintain, repair and keep in repair the premises to the satisfaction of the relevant government entity.

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) and (c), as 'additional site works'.

•         The Crown Lease may be terminated by the relevant government agency in the following circumstances:

(a)       Any rent or other moneys payable by Entity A under the lease remain unpaid for x months after the appointed payment date.

(b)       Entity A fails to commence an approved development within the timeframe specified in Clause x

(c)       Entity A fails to complete an approved development within the timeframe specified in Clause x.

(d)       After completion of the approved development, the land is not used for an approved purpose (specified in Clause x) for at least one year.

(e)       Entity A fails to observe or perform any other covenants contained in the Crown Lease and fails to remedy such breach within x months after the relevant government agency serves Entity A with a written notice of the breach.

Subject to Entity A paying all money required to be paid under the provisions of the relevant legislation, 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 obtained development approval on xxyyyy for the construction of a multi-unit housing complex comprising of a x unit residential development in x and x storey buildings, basement car parking and associated landscaping, paving, drive ways, verge crossings, court yard walls/fencing, site facilities and other site and off-site works.

Entity A completed construction at a cost of $x.

On xxyyyy a certificate of occupancy and use was granted to Entity A by the relevant government agency under the relevant government legislation. It states that the building work has been completed substantially in accordance with the prescribed requirements and is considered fit for occupation and use. The building works referred to on the certificate are apartments and townhouses.

On xxyyyy a certificate of compliance was issued to Entity A by the relevant government agency under the relevant government legislation. It states that the building and development covenants contained in the Crown Lease have been complied with. The application for the certificate of compliance states that a copy of the certificate of occupancy and use must be provided at the time of lodgement of this application.

Following this, Entity A registered its unit titles application with the relevant government agency. The relevant government agency assessed the application to ensure that the creation of the units would be in accordance with the relevant government legislation.

Following the completion of the development by Entity A, the unit titles application was approved and endorsed by the relevant government agency.

Entity A lodged the approved unit titles application with the relevant government agency along with the Units Plan application form. The Crown Lease was also required to be lodged with this form.

The relevant government agency registered the original Units Plan on xxyyyy (and reissued the Units Plan on xxyyyy after amendments were made to the original Units Plan. This had the effect of automatically ending the Crown Lease, pursuant to the relevant legislation. The relevant government agency was obliged to cancel the original Crown Lease (per the relevant government legislation and issue certificates of title for each unit and for the common property (per the relevant government legislation.

Entity A then became 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) pursuant to the relevant legislation.

On xxyyyy, a Sustainability Report confirmed that the residences nominated for inspection have been constructed in accordance with the summary contained therein. The Sustainability Report was provided to the relevant government agency on xxyyyy as part of Entity A's request for the release of the bond.

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
• 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 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. 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 performed for the benefit of the lessee and are not provided to the relevant government agency.

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 x year lease - a market value lease - was $XX. The final cost of the development was $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 would commence within x months and 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 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.

Entity A obtained development approval on xxyyyy for the construction of a multi-unit housing complex and associated works. The conditions contained in the Contract and 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 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 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.

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.