Edited version of private advice

Authorisation Number: 1052078198944

Date of advice: 10 February 2023

Ruling

Subject: GST liability

Question

Does the receipt of assets constructed by a customer result in a GST liability?

Answer

Yes. Where a supply of assets from a customer to you constitutes non-monetary consideration for a supply you make, you must remit GST on those supplies.

The scheme commences on:

The date this notice of decision is issued

Relevant facts and circumstances

You are an entity that provides industry infrastructure. Customers have the option of undertaking construction of certain assets which they are required under the terms of your arrangements, to transfer to you.

Relevant legislative provisions

Electricity Industry Act 2000, section 3.

Essential Services Commission Act 2001

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.

A New Tax System (Goods and Services Tax) Act 1999, section 9-17.

A New Tax System (Goods and Services Tax) Act 1999, section 11-5.

A New Tax System (Goods and Services Tax) Act 1999, section 29-5.

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

Income Tax Assessment Act 1936, section 21A.

Reasons for decision

The transfer of an asset of which there is no consideration paid is a non-monetary consideration provided for by the transfer of the asset.

It is not in dispute that there is a transfer of an asset where a customer elects' too construct the asset. The customer enters into a contract with you that the asset will transfer to you when completed. In return the customer gains connection to the infrastructure network.

Although there is a transfer of property, the transfer is not voluntary, it is clear there is a benefit to the customer as a result of the transfer.

Section 9-5 provides that a taxable supply is made 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 accepted that a supply of infrastructure is being made in the course of your enterprise. The supply is connected with the indirect tax zone, and they are registered for GST. Therefore, three elements of section 9-5 are satisfied.

In order to determine whether the supply is a taxable supply we have to determine whether the supply of infrastructure services is for consideration. If that is the case, then all the conditions of section 9-5 will be satisfied.

In accordance with the state regulatory body you hold a licence to enable you to provide the infrastructure to a customer. You are required to make an offer to a customer for connection to the infrastructure of which they can choose to construct the asset portion themselves.

There is a portion of the infrastructure that you are required by law to undertake. It is not in contention that you are in receipt of monetary consideration for this supply.

You are also in receipt of an asset from a customer which the customer has paid a third party to construct.

Therefore, there are two separate supplies being made in this case.

Consideration

Section 195-1 defines 'consideration' as:

"consideration" for a supply or acquisition, means any consideration, within the meaning given by section 9-15 and 9-17, in conjunction with the supply or acquisition.

Subsection 9-15 (1) provides:

(1)  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.

(2)  It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the

recipient of the supply.

Section 9-17 has no application in this case.

Goods and Services Tax Ruling GSTR 2001/6 'Goods and services tax: non-monetary consideration (GSTR 2001/6) explains how the GST Act applies if part or all of the consideration for a supply is not expressed as an amount of money (that is non-monetary consideration). This includes transactions commonly referred to as barter, part exchange and in-kind payments.

Paragraph 12 of GSTR 2001/6 states:

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); and

•         entering into an obligation, for example to refrain from selling a particular product (s forbearance).

Paragraph 14 of GSTR 2001/6 states that in some transactions, particularly those involving money only, the consideration is readily apparent. However, where there is monetary consideration for a supply, it does not necessarily follow that there is no other consideration for that value of that supply. If you receive non-monetary consideration for a supply, the price includes the GST inclusive market value of that consideration.

In this case, the transferring of the asset by the customer to you is not as a result of a transaction involving the exchange of money for an item.

Therefore, if it meets the definition of consideration, we can conclude that it is non-monetary consideration.

Non-monetary consideration can itself be a supply. Paragraph 16 of GSTR 2001/6 sets out the principle:

By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply you make. If it is a taxable supply, you need to determine the GST inclusive market value of the consideration you receive for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you.

In AP Group Limited v Commissioner of Taxation [2013] FCAFC 105, the Full Federal Court examined the first part of the taxable supply test, i.e., whether the supply is for consideration in connection with a supply. The Court determined that the appropriate level of generality or particularity at which to determine whether a supply is for consideration is fact-dependent.

The identified supplies can themselves be consideration. Given that the overall arrangement comes about because of a need of a customer to be connected to your infrastructure, the appropriate level of particularity is the supply of the assets from a customer is better considered to be consideration for that connection supply you are required to provide to the customer.

That is, the transfer of the asset is non-monetary consideration for your supply of connection to your infrastructure.

Paragraph 32 of GSTR 2001/6 indicates that where the transaction includes both monetary and non-monetary consideration, it is necessary to establish the value of the supply in monetary terms in order to apply GST. This must be established on an arms' length basis. In the normal course of events the parties are not associates.

In paragraph 93 of the VPN decision, it was stated that the character of the option 2 transaction:

.. did not involve any commitment by the customer to make a payment to the distributor in the amount of the shortfall. Rather, it involved the customer undertaking the contestable works. The evident purpose of doing so was to afford the customer the opportunity to undertake those works at a lower cost than the estimate and, from the perspective of the customer, thereby reduce the extent of the consideration it had to pay for the connection. In order for the transaction to have that character there could be no obligation on the part of the customer to pay the distributor the amount of the shortfall.

Paragraphs 47 & 48 of GSTR 2006/1 assists with identifying non-monetary consideration and whether there is sufficient nexus between the supply and the payment as consideration.

47. The definition of a taxable supply requires, among other things, that you make a supply for consideration. There needs to be a supply, a payment and the necessary relationship between the supply and the payment. Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is a sufficient nexus between the supply and the payment as consideration.

48. The same analysis applies in determining whether a good, service or thing is non-monetary consideration for a supply. However, due to the breadth of the definition of consideration (and the numerous promises that each party to a transaction usually makes), establishing what is the consideration for a supply is not always as simple as for monetary transactions. Nor is it always as clear if something of economic value is being provided.

There must be a connection between any consideration provided and the supply being made. If the consideration is not for an identified supply, it is not effective consideration. If on the other hand if a supply is a taxable supply there must be a sufficient nexus between a supply and consideration.

Paragraphs 64 - 72 of GSTR 2001/6 provides the ATO view in relation to the nexus test in Australia.

64. A supply is not subject to GST in Australia unless it is made for consideration. Consideration for a supply or acquisition is defined in section 195-1 as any consideration, within the meaning given by sections 9-15 and 9-17, that is in connection with the supply or acquisition.

65. We Consider that, in the context of the GST Act, the expression you make the supply for consideration in paragraph 9-5(a) has similar meaning to there is consideration for the supply that you make.

66. The references in the GST Act to supply for consideration and more commonly to consideration for a supply underscore the close coupling between the supply and the consideration that is necessary before a payment will be consideration for a supply subject to GST.

67. In a similar fashion to the GST legislation in New Zealand, the nature of the nexus required between supply and consideration is specified in the definition of consideration. 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.

68. In determining whether a payment is consideration under subsection 9-15(1), the test is whether there is a sufficient nexus between the supply and the payment made.

69. This test may establish a nexus between consideration and supply in a broader range of cases than the 'direct link' test that applies in the European Community and in Canada. While caution needs to be broader in scope than 'for'.

70. The meaning given to the term 'in connection with' in Barry v. FC of T (1953) 89 CLR 653 (berry's case) is similar to that which was described by the Court of Appeal in New Zealand Refining, but needs to be applied with regard to the structure of the definition of supply in the GST Act. In Berrys case, Kitto J held that 'in connection with' was a broader test than 'for'. At page 659, his Honor commented that consideration will be in conjunction with property where:

'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

71. 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 that parties give to the arrangement but looking at all of the transactions entered into and the circumstances in which the transactions are made.

72.The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive.

Where a customer elects to get a third party to construct the assets and once completed these assets are transferred to you, the result of this transfer is the customer is connected to your infrastructure which is maintained by you.

There is a clear nexus between the transfer of the asset and the supply made to the customer of their connection to the infrastructure.

Conclusion

As all the requirements of section 9-5 are met, the supply of the connection to the infrastructure is a taxable supply and the consideration for the supply is monetary consideration of the connection fee and non-monetary in the form of the asset.