Edited version of private advice

Authorisation Number: 1052090197870

Date of advice: 22 February 2023

Ruling

Subject: GST and creditable acquisitions on subsidy payments

Question 1

Are the Subsidy Payments consideration within the meaning of section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for a taxable supply (within the meaning of section 9-5 of the GST Act) made by the Provider to you.

Answer

Yes.

Question 2

If the answer to Question 1 is yes, is the acquisition that you make in consideration for the Subsidy Payments a creditable acquisition within the meaning of section 11-5 of the GST Act?

Answer

Yes.

Relevant facts and circumstances

You are a government related entity involved in residential projects that consist of procuring the construction of residential accommodation to be leased as affordable housing. You are registered for GST.

You entered into an arrangement (the Arrangement) with a provider of property development services (the Provider) for the construction of residential accommodation for affordable rental housing purposes on the land located at <address> (the Site). The Provider is registered for GST.

Broadly, the effect of the Arrangement can be described as follows:

• the Provider must purchase the Site and develop a building on it comprising of an agreed number of dwellings (Dwellings) and use its best endeavours to lease these Dwellings to tenants that meet the eligibility criteria agreed to between yourself and the Provider (Eligible Tenants)
• the Provider is responsible for assessing whether prospective tenants meet the eligibility criteria and entering into residential tenancy agreements with them; you are not a party to the residential tenancy agreements entered into with eligible tenants
• the Provider is subject to various obligations under the Arrangement, including the obligation to rent out the Dwellings to Eligible Tenants, operate maintain and repair the Building and all Dwellings and all services provided during the term. The Provider is subject to annual reporting requirements, and obligations to obtain and maintain a real estate agent's licence (if required by law) and other authorisations required to perform its obligations
• the rent stipulated on the residential tenancy agreements entered into with Eligible Tenants is subsidised and set at X% of the market value rent for that Dwelling (Subsidised Rent). The residential tenancy agreement must include an acknowledgement statement from the Eligible Tenant that the rent is subsidised by you, such that the Eligible Tenants are aware of the additional obligations they are required to comply with that exceed those of an ordinary market rental tenant. Eligible Tenants pay the subsidised rent to the Provider
• the Y% shortfall on the market value rent is payable by you to the Provider in the form of an Annual Subsidy Payment. The Annual Subsidy for rent is calculated on an annual basis for each Dwelling leased to Eligible Tenants.

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 11-10

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 149-15

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

Reasons for decision

Question 1

Are the Subsidy Payments consideration for a supply made by the Provider?

'Consideration' is defined in section 195-1 to mean 'any consideration, within the meaning given by section 9-15, in connection with the supply'. Subsection 9-15(1) provides that consideration includes:

a)    any payment, or any act or forbearance, in connection with a supply of anything; and

b)    any payment, or act or forbearance, in response to or for the inducement of a supply of anything.

Subsection 9-15(2) provides that it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6) sets out the Commissioner's view of what constitutes non-monetary consideration for the purposes of section 9-15. Although non-monetary consideration is not an issue arising in your case, the general principles contained in GSTR 2001/6 of how the Commissioner interprets section 9-15 have application on these facts.

Paragraphs 49 to 51 of GSTR 2001/6 provide that there needs to be a connection between the supply and the payment for the supply to be made for consideration, and that the recipient of the supply need not be the provider of the consideration:

What is 'consideration'?

49. Consideration is defined in section 195-1 to mean 'any consideration, within the meaning given by section 9-15, in connection with the supply'. The meaning given to consideration in section 9-15 extends beyond payments to include such things as acts and forbearances. It may include payments made voluntarily, and payments made by persons other than the recipient of a supply.

50. Section 9-15 further provides that 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. Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply.

51. It follows that there are two elements to the definition of consideration. The first is the payment by one entity to another. The second element is the nexus that must be established between the payment and a supply.

Paragraphs 71 and 72 of GSTR 2001/6 provide that the test of determining a sufficient nexus between the supply and the consideration is an objective one based on the true character of the transaction:

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 by 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.

In your case, the relevant payments which need to be examined in the context of section 9-15 are the Subsidy Payments which you make pursuant to the terms of the Arrangement. Consequently, it needs to be determined whether each of the Subsidy Payments are in connection with, or in response to, or for the inducement of, a supply of anything under the Arrangement.

Subsection 9-10(1) provides that a supply is any form of supply whatsoever. Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) further examines the meaning of supply under section 9-10.

Paragraph 22 of GSTR 2006/9 outlines the ten propositions which may be relevant to characterising and analysing supplies. The most pertinent of the propositions on these facts include:

• Proposition 2: Generally, for every supply there is a recipient and an acquisition
• Proposition 4: A transaction may involve two or more supplies
• Proposition 5: An entity will make a supply if it provides something of value to another entity
• Proposition 6: 'Supply' usually, but not necessarily, requires something to be passed from one entity to another.

The Arrangement involves things being provided to entities other than you and the Provider. The Commissioner refers to arrangements involving more than two entities as tripartite arrangements, and provides an overview of what they entail in paragraphs 115 and 116 of GSTR 2006/9:

115. In more complex arrangements involving more than two entities, which the Commissioner refers to as tripartite arrangements, analysis may reveal:

•         a supply made to one entity but provided to another entity;

•         two or more supplies made; or

•         a supply made and provided to one entity and consideration paid by a third party.

116. As with two party transactions, the GST consequences of tripartite arrangements turn on identifying:

•         one or more supplies;

•         consideration (a payment act or forbearance);

•         a nexus between the supply and the consideration; and

•         to whom the supply is made.

The ten propositions for supplies discussed above are equally applicable to tripartite arrangements. Additional propositions apply specifically to tripartite arrangements and these are described in paragraph 117 of GSTR 2006/9. The most pertinent of these in your case is Proposition 15 - namely, one set of activities may constitute the making of two or more supplies. Proposition 15 is discussed in more detail in paragraphs 217 and 217A of GSTR 2006/9 with reference to the seminal case Federal Commissioner of Taxation v Secretary to the Department of Transport (Vic) [2010] FCAFC 84:

217. Examining the levels of contractual or reciprocal relationships between the entities in a tripartite arrangement may reveal two or more supplies being made based upon the one set of activities.

217A. This proposition is illustrated by Federal Commissioner of Taxation v. Secretary to the Department of Transport (Vic) (Department of Transport), where the activity undertaken by the taxi operator of transporting the eligible passenger resulted in two supplies being made:

(i)            the supply of transport to the passenger; and

(ii)           the supply to the Department of the service of transporting the eligible passenger.

The Department of Transport case concerned an arrangement where taxi-cab operators provided discounted trips for passengers with disabilities that were members of the Multi-Purpose Taxi Program (MPTP), and the Department of Transport (DOT) reimbursing the taxi-cab operator for the shortfall between the full-price fare and the discounted fare. The reimbursement was referred to as an 'MPTP Payment'. Kenny and Dodds-Streeton JJ observed the following GST consequences of this arrangement at paragraph 45 of the judgment:

45. ... The occasion for the MPTP Payments was not the grant of a taxi-cab licence. Indeed, a licensee could have operated a taxi-cab under a taxi-cab licence without the DOT ever having made a MPTP Payment, or having incurred any liability to make a MPTP Payment, to that licensee. The DOT made a MPTP Payment to a taxi-cab operator, or assumed the liability to make such a payment, only when the taxi-cab operator made a MPTP trip. As the DOT submitted, in the ordinary case, the trip became an MPTP trip, and the obligations under the MPTP were enlivened, when the driver inserted the Member MPTP Card into the EFTPOS terminal and received the authorisation to undertake the trip as an MPTP trip.

In your case, like in Department of Transport, there is a commitment by the Provider to you to fulfill obligations. The obligations being, at a high level, providing residential accommodation of the Dwellings by way of lease at a discounted rate to third parties (prospective tenants) when specific criteria are met.

Once a Dwelling is leased for the Subsidised Rent, the obligations on you to pay the Annual Subsidies are triggered.

The Arrangement and its GST consequences resemble Example 11B in paragraphs 221L to 221R of GSTR 2006/9, which are reproduced below:

Example 11B: specialised equipment - two separate supplies

221L. A State government's policy provides that any eligible resident (E) of specified country areas should have access to telecommunications services that are accessible through specialised equipment, at a scheduled price.

221M. The State government (G) enters into a contract with a retailer of specialised equipment (R) where if R sells the specialised equipment to an eligible person, R must charge the eligible person a scheduled price. The scheduled price is lower than the recommended retail price and under the agreement R is entitled to receive from G a specified amount when R sells specialised equipment to E for the scheduled price. The specified amount is calculated as the difference between the recommended retail price and the scheduled price.

221N. To assist R in identifying eligible residents, G issues an eligibility card to E that is presented to R when E purchases the specialised equipment.

221O. If R does not supply the specialised equipment to E for the scheduled price, for example, because E does not present the eligibility card, and therefore E buys the specialised equipment at the recommended retail price, E cannot seek the specified amount from G.

221P. Each time R sells specialised equipment to E for the scheduled price, R will be entitled to claim the specified amount from G. Under the contract between R and G, R makes a supply to G because it enters into and fulfils an obligation to provide specialised equipment to E for the scheduled price.

221Q. G's payment of the specified amount to R is the contractual consideration G provides to R under the contract between them in return for R undertaking and fulfilling its contractual obligations. The specified amount received by R from G is consideration for the supply made by R to G.

221R. If R is registered or required to be registered for GST, R has made a taxable supply to G for consideration which is calculated as the difference between the recommended retail price and the scheduled price charged to E. R issues a tax invoice to G where the specified amount is the GST-inclusive price of the supply to G. R is liable to remit GST and G has made a creditable acquisition and is entitled to claim input tax credits if the requirements of section 11-5 are met.

In your case, the Provider has entered into binding obligations with you under the Arrangement which are connected to you pursuing your objectives. These obligations involve the Provider making commitments to you to deliver outcomes by acquiring the Site, building the Building containing the Dwellings that are to be leased to Eligible Tenants at subsidised rates. In doing so, the Provider has also committed to meeting obligations around maintenance and repair of the Building and Dwellings, assessing prospective tenant eligibility in line with the eligibility criteria, annual reporting, and other obligations under the Arrangement.

Based on the principles extracted above from GSTR 2006/9 and the Department of Transport case, the above analysis demonstrates that the Provider's obligations are providing you with something of value, and so the Provider is making a supply to you of entering into and fulfilling those obligations. We consider that the payments of the Annual Subsidies that you make are consideration for the supply of the Provider's obligations under the Arrangement.

In conclusion, all of the Subsidy Payments are consideration for a supply made by the Provider, being the Provider's obligations under the Arrangement.

Are the Provider's obligations a taxable supply?

Section 9-5 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)

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.

For the reasons stated above, the Provider is making a supply of its obligations under the Arrangement for consideration, being your obligations to pay the Subsidy Payments. The supply of the Provider's obligations is in the course or furtherance of its enterprise as a property. The supply of the Provider's obligations is connected to the indirect tax zone. The Provider is registered for GST. The supply of the Provider's obligations is not GST-free.

The supply of residential premises by way of lease is input taxed to the extent that those premises are to be used predominantly for residential accommodation (regardless of the term of occupation) under section 40-35. The facts show that the Dwellings to be leased by the Provider will be used predominantly for residential accommodation as they are designed for and intended to be used as homes for tenants.

The principles extracted above from GSTR 2006/9 and the Department of Transport case both draw a distinction between obligations supplied to the provider of the consideration, and the things supplied under those obligations to the third party recipient of those things. While the Provider has obligations to you to lease the Dwellings to Eligible Tenants, those obligations do not constitute a supply of residential premises to you. Therefore, the Provider's supply of its obligations to you under the Arrangement are not input taxed under section 40-35. The supply of the Provider's obligations is a taxable supply.

Conclusion to Question 1

Your payment of the Subsidy Payments is consideration within the meaning of section 9-15 for one or more taxable supplies within the meaning of section 9-5 made by the Provider.

Question 2

Summary

The acquisitions you make for the Subsidy Payments are creditable acquisitions within the meaning of section 11-5 of the GST Act.

Detailed reasoning

Section 11-5 provides that you make a creditable acquisition if:

a)    you acquire anything solely or partly for a creditable purpose

b)    the supply of the thing to you is a taxable supply

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

d)    you are registered or required to be registered.

'Acquisition' is defined in subsection 11-10(1) as any form of acquisition whatsoever. The concept of 'acquisition' is further explained in paragraph 15 of GSTR 2006/9:

15. You make an acquisition if you are the recipient of a supply. That is, the supply is made to you. In most transactions concerning GST the recipient of a supply is the entity that is also provided with that supply. In contrast, some supplies are made to the recipient, but provided to another entity. Arguably, such provisions are also supplies. However, these are not relevant because there is no contractual or reciprocal relationship between the supplier and the entity being provided with the supply. An entity must have made an acquisition of a thing to satisfy the requirements of section 11-10. It is not sufficient that an entity has merely been provided with the supply. Also, an entity does not make an acquisition merely by paying for a supply.

In your case, you are recipient of the supply of the Provider's obligations, as the Provider is making a supply to you of entering into and performing those obligations for the reasons discussed in Question 1. You are therefore making an acquisition of the Provider's obligations.

The supply of the Provider's obligations to you is a taxable supply, and you provide or are liable to provide the consideration in the form of the Subsidy Payments, for the reasons discussed in Question 1. You are registered for GST.

It remains to be determined whether you are acquiring the Provider's obligations for a creditable purpose. Creditable purpose is defined in Section 11-15. Subsection 11-15(1) provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However, subsection 11-15(2) provides that you do not acquire a 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.

Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) provides the Commissioner's view on when things are acquired solely or partly for a creditable purpose under section 11-15. In particular, paragraph 64 provides the following:

64. Whether something is acquired in carrying on an enterprise requires a connection or link between the thing acquired and the enterprise.

In your case, as you are a government related entity, the Commissioner is required to treat you as an entity carrying on an enterprise while your GST registration has effect pursuant to section 149-15. Your entry into the Arrangement, and consequently your acquisition of the Provider's obligations, is in the course of you carrying out your functions as a government related entity.

Your acquisition of the Provider's obligations does not relate to you making input taxed supplies of residential premises by way of lease. You do not lease the Dwellings to Eligible Tenants, nor does the Provider lease the Dwellings on your behalf. The Dwellings are owned by, and leased by, the Provider, and as such you are not making input taxed supplies of residential premises. Therefore, you have acquired the Provider's obligations for a creditable purpose.

In conclusion, your acquisition of the Provider's obligations is a creditable acquisition under section 11-5.