Edited version of private advice

Authorisation Number: 1052122712967

Date of advice: 1 June 2023

Ruling

Subject: GST - long-term leases

Question 1

Are the Development Works (collectively, the Building Works or Approved Development and Associated Works) undertaken by Entity B pursuant to the Contract for Sale, Project Delivery Deed and Crown Lease (collectively referred to as the Transaction Documents), on Block XX, Section XX in the Australian Capital Territory (the Land), additional consideration pursuant to section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the taxable supply of the Land by Entity A under section 9-5 of the GST Act?

Answer

The Offsite Works and the Associated Works described in the Transaction Documents are consideration within the meaning of section 9-15 only to the extent that any of these automatically belong to a government agency or are transferred to a government agency, or a third party nominated by a government agency (whether on unleased land or Crown lease land), in addition to the purchase price of the Land, for the taxable supply made by Entity A under section 9-5.

All other Development Works contemplated under the Transaction Documents and undertaken by Entity B (including the Building Works or Approved Development) are not consideration within the meaning of section 9-15 for the taxable supply of the Land under section 9-5 by Entity A

Question 2

Is Entity A making a creditable acquisition, pursuant to section 11-5 of the GST Act, of the Development Works (collectively, the Building works or Approved Development and Associated Works) undertaken by Entity B, pursuant to the Transaction Documents, on the Land?

Answer

Entity A is making a creditable acquisition pursuant to section 11-15 of the Offsite Works and the Associated Works described in the Transaction Documents only to the extent that any of these automatically belong to a government agency or are transferred to a government agency, or a third party nominated by a government agency (whether on unleased land or Crown lease land).

Entity A is not making a creditable acquisition pursuant to section 11-15 of any other Development Works contemplated under the Transaction Documents and undertaken by Entity B (including the Building Works or Approved Development).

Relevant facts and circumstances

On <date>, Entity B entered into a Commercial Contract for Sale ('Contract') to purchase Block X Section X ('the Land') in the ACT from Entity A under a long-term lease for the purchase price. Entity B was required to complete Development Works on the Land, in accordance with the Transaction Documents, as part of the conditions of the long-term lease. The Development Works included Associated Works. Some of these Associated Works are for the benefit of Entity A while others are retained by Entity B. Entity B was also permitted to undertake Building Works on the Land, which Entity B retains the benefit of.

Completion of the Works was not a condition of acquiring the long-term lease from Entity A. However, failure to complete the Works in accordance with the terms of the Transaction Documents is a breach of the long-term lease and entitled Entity A to terminate the lease. Entity B would be compensated for any Works retained by Entity A in the event this occurred.

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 9-25

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 149-15

Reasons for decision

Are the Development Works 'consideration' for the 'supply' of the Land by Entity A?

Supply

Section 9-10 defines what is meant by 'supply'. Subsection 9-10(1) provides that a 'supply' is any form of supply whatsoever.

Subsection 9-10(2) provides that a supply includes, without limiting subsection (1), any of these

(a)             a supply of goods;

(b)             a supply of services;

(c)             a provision of advice or information;

(d)             a grant, assignment or surrender of * real property ;

(e)             a creation, grant, transfer, assignment or surrender of any right;

(f)              a * financial supply an entry into, or release from, an obligation:

(g)             to do anything; or

                                       i.       to refrain from an act; or

                                      ii.       to tolerate an act or situation;

(h)             any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Entity A's grant of a long-term lease in the Land to Entity B pursuant to the Transaction Documents is a grant of real property, and is a 'supply' for the purposes of section 9-10.

Consideration

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

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration. (GSTR 2001/6) outlines how GST applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, if it is non-monetary consideration).

Paragraph 12 of GSTR 2001/6 explains that consideration is not limited to payments of money:

12. 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 (a forbearance).

Paragraphs 50 and 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:

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.

Goods and Services Tax Determination GSTD 2021/1 Goods and services tax: development works in the Australian Capital Territory (GSTD 2021/1), provides advice on the GST treatment of arrangements between government agencies and private developers in the context of the development of land in the ACT.

GSTD 2021/1 considers whether building works or approved development carried out by developers on land they have acquired under a long-term Crown lease (Crown lease) and associated site works, have the necessary nexus and are therefore non-monetary consideration for the supply of that Crown Lease by a government agency.

Paragraphs 5 to 12 of GSTD 2021/1 outline the types of ACT development lease arrangements the Determination applies to:

5.    Under a building arrangement, the monetary amount a developer pays to a government agency on completion of the contract to acquire a Crown lease over land in the ACT is consideration for the supply of the Crown lease by the government agency for the purposes of section 9-5.

6.    However, the building works a developer completes under a building arrangement (in accordance with the terms of the PDA and the Crown lease) are not consideration for the supply of the Crown lease by the government agency under section 9-5.

7.    The building works are not non-monetary consideration for the supply of the Crown lease land because the building works provide no measurable economic value to the government agency. The building works are of value to the developer as they can either retain the land, subdivide the land and sell the individual lots or sell the Crown lease land in its entirety to another entity.

8.    While the developer is required to complete these building works within a certain time period after acquiring the Crown lease, this stipulated timeframe does not make these works non-monetary consideration for the supply of the Crown lease.

9.    As explained in paragraph 3 of this Determination, the developer may also be required to undertake associated site works which fall into three categories.

10.  If ownership of the completed associated site works is retained by the developer, they are not non-monetary consideration for the supply of the Crown lease land by the government agency. This is because the associated site works retained by the developer provide no measurable economic value to the government agency.

11.  While building works and associated site works retained by the developer may assist in fulfilling a government agency's objectives of developing areas of land, they do not provide the government agency with anything other than assurance that the land is developed in compliance with the relevant government approved plans and the development complies with relevant laws (for example, environmental or health and safety laws).

12.  Completed associated site works that automatically belong to a government agency or are transferred to a government agency, or a third party nominated by the government agency (whether on unleased land or the Crown lease land), are non-monetary consideration for the supply of the Crown lease land. This is the case provided Division 81 and Division 82 do not apply.

The Transaction Documents in this case show that the arrangement between Entity A and the Entity B have the typical features of a building arrangement as outlined in GSTD 2021/1 and has application in this case. The following factors were relevant in making this decision:

•         Entity B was granted a long-term lease by Entity A pursuant to the Transaction Documents Contract for Sale and Specimen Lease, for a term of 99 years, for the purpose of constructing the Development Works Building Works, Offsite Works and Associated.

•         Entity B is required to complete the Building Works within 48 months from the date of commencement of the lease.

•         Entity B is required to complete the Associated Works within 24 months from the date of commencement of the lease and prior to any construction on the Land.

•         The Offsite Works are to be completed by 30 months after the date of the Contract for Sale.

•         The Building Works are to be retained by Entity B.

•         The lease is conditional upon Entity B designing and constructing at Entity B's cost, Associated Works and Offsite Works with the lease that are to become assets of either Entity A or other entities.

In order for the Building Works, Approved Development or Associated Works or Offsite Works to be consideration for the supply of the Crown lease land, there must be sufficient nexus between the supply and the consideration.[1]

For goods, services or a 'thing' to be non-monetary consideration for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. It must be capable of being valued and be a thing the acquirer would usually or commercially pay money to acquire.[2]

Paragraph 39 of GSTD 2021/1 states, as the meaning of consideration is broad, not all promises and obligations made and agreed between the parties will be non-monetary consideration for a supply. Some things are simply part of the terms of the arrangement on which the respective parties have reached agreement. Promises or obligations that have no economic value or independent identity separate from the transaction will not be non-monetary consideration for a supply.[3]

In the context of granting a lease over land, the essential character of what is supplied is the legal right to exclusive possession of the land for the term. However, this does not prevent the owner of the freehold interest in the land imposing conditions regarding permitted use that will apply for the term of the lease.[4]

The incorporation of 'building and development provisions' into ACT Crown leases, together with statutory restrictions on transfer or assignment of the Crown lease until these building and development provisions are satisfied[5], are standard obligations in Crown leases in the ACT (paragraph 41 GSTD 2021/1).[6]

Paragraph 43 of GSTD 2021/1 explains that in relation to the building works or approved development, while the developer does not have a freehold interest in the land, the nature of a Crown lease in the ACT (usually for 99 years, at nominal rent, automatically renewable and compensation payable for the value of improvements if not renewed) results in:

a.            the developer, as lessee, being the only entity able to lease or dispose of an interest in the buildings it constructs on the Crown lease land

b.            no increase in the value of the reversion held by the ACT as the rent remains nominal for the duration of the Crown lease and future renewals, and

c.             the developer or future lessees being entitled to compensation for the building works if the lease is ever terminated.

The Building Works or Approved Development constructed by Entity B on the Crown lease land are retained by Entity B. Entity B is able to sell or rent the Building Works or Approved Development. On surrender or termination of the lease the value of the improvement (being the Building or Approved Development) is paid from Entity A to Entity B.

Undertaking the Building Works or Approved Development by Entity B on the Land does not provide Entity A with anything of measurable economic value. For this reason, the construction of Building Works or Approved Development on the Crown lease land is not the provision of non-monetary consideration for Entity A supply of the land.[7]

Entity B is required to provide Associated Works under Clause 3 of the Specimen Lease and Offsite Works in the PDD. Where these Associated Works and Offsite Works are retained by Entity B, they do not constitute non-monetary consideration because Entity B is not providing another party with anything of measurable economic value in this case.[8] Therefore these Associated Works and Offsite Works are not consideration within the meaning of section 9-15 for Entity A's supply of the Land.

However, the completed Associated Works and Offsite Works that automatically belong or are transferred to Entity A, or a third party nominated by Entity A (whether on unleased land or Crown lease land) are non-monetary consideration because Entity B is providing Entity A or the nominated third party something of economic value. Therefore, these Associated Works and Offsite Works will be consideration within the meaning of section 9-15 for Entity A's supply of the Land.[9]

The value of the non-monetary consideration is determined in accordance with the principles set out in GSTR 2001/6. This ruling has been discussed above.

Is the supply of the Land by Entity A a taxable supply?

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

As advised above in the ruling Entity A's grant of a long-term lease in the Land to Entity B pursuant to the Transaction Documents is a grant of real property, and so is a 'supply' for the purposes of section 9-10.

Consideration

The lease was required for a consideration of $XX million (GST inclusive).

Registration for GST and carrying on an enterprise

Section 149-15 of the GST Act provides that:

For the purposes of the GST law, a government entity that is registered is treated, while its registration has effect, as if it were an entity carrying on an enterprise.

Entity A is a government entity and is registered for GST. Therefore, Entity A is considered to be carrying on an enterprise.

Supply connected with the indirect tax zone

A supply connected with the indirect tax zone is defined under section 9-25.

Subsection 9-25(4) advises:

A supply of real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone.

The Land is located in Australia. Therefore, the supply is connected with the indirect tax zone.

The supply of the Land by Entity A is a taxable supply under section 9-5 as:

•         Entity A granted a supply of a long-term lease for $XX million,

•         Entity A made the supply in the course or furtherance of an enterprise that they carry on;

•         The Land is connected to the indirect tax zone as it is located in Australia;

•         Entity A is registered for GST.

Conclusion

The completed Associated Works that automatically belong or are transferred to Entity A are the provision of non-monetary consideration for Entity A's taxable supply of the Land, as Entity A receives something of economic value. Therefore, these Associates Works will be additional consideration within the meaning of section 9-15 for Entity A supply of the Land.

The completed Building Works or Approved Development, Associates Works and Offsite Works that are retained by Entity B are not non-monetary consideration for Entity A supply of the Land. Entity B receives the economic benefit of these works as they are able to lease or sell them. Therefore, Building Works or Approved Development, Associates Works and Offsite Works that are retained by Entity B will not be consideration within the meaning of section 9-15 for Entity A supply of the Land.

Question 2

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

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

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

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

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

Did Entity A acquire the Development Works for a creditable purpose?

It first needs to be determined if Entity A has actually 'acquired' the Development Works, for the purposes of section 11-5. Subsection 11-10(1) defines 'acquisition' as any form of acquisition whatsoever. The ATO view on what constitutes an 'acquisition' is further explained in paragraphs 14-15 and 53-54 of GSTR 2006/9. These are extracted below:

14. Supply is important in relation to input tax credits because if a supply is not made an entity cannot acquire anything for a creditable purpose, as required by paragraph 11-5(a). Making an acquisition of something is the first element to be considered in determining whether you make a creditable acquisition under section 11-5. The meaning of acquisition is given in section 11-10. The second element is the requirement in paragraph 11-5(b) that the supply of the thing to you is a taxable supply.

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.

...

53. The meaning of 'acquisition' in section 11-10 is the corollary of the meaning of supply in section 9-10. Subsection 11-10(1) provides that, 'An acquisition is any form of acquisition whatsoever'. Subsection 11-10(2) refers to the thing acquired, such as goods, services or a right, and the means by which the thing is acquired, such as its receipt or acceptance.

54. To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.

As discussed in the answer to Question 1, the only non-monetary consideration provided by Entity B to Entity A are the completed Associated Works and Offsite Works that automatically belong or are transferred to Entity A. Consequently, these are the only acquisitions made by Entity A that are relevant to the analysis of section 11-15. The Building Works or Approved Development and the Associated Works and Offsite Works that do not automatically belong to a government agency or are not transferred to a government agency, or a third party nominated by a government agency (whether on unleased land or the Crown lease land) are not acquired by Entity A.

It now needs to be determined whether the acquisitions identified above have been made for a creditable purpose. The meaning of creditable purpose is explained under section 11-15.

Subsection 11-15(1) advises you acquired a thing for a creditable purpose to the extent that you acquired it in carry on your enterprise.

Under subsection 11-15(2) you do not acquire the 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.

Is the supply of the thing to Entity A a taxable supply?

The supply made by Entity B of the Development Works acquired by Entity A needs to be a taxable supply in order for paragraph 11-5(b) to be satisfied.

Paragraph 16 of GSTR 2001/6 provides that by providing non-monetary consideration for a supply, you are in turn making a supply.

Entity B makes a taxable supply of the Associated Works acquired by Entity A under section 9-5 of GST Act if:

•         Entity B makes the supply for consideration

•         the supply is made in the course or furtherance of an enterprise that Entity B carries on

•         the supply is connected with the indirect tax zone (Australia), and

•         Entity B is 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.

As set out in Question 1, the completion of the Building Works or Approved Development and the Associated Works and Offsite Works (except for the Associated Works and Offsite Works that automatically belong to a government agency or are transferred to a government agency, or a third party nominated by a government agency (whether on unleased land or the Crown lease land) are not non-monetary consideration for the supply of the Land.

Consequently, there is no supply by Entity B to Entity A in respect of the Building Works or Approved Development and the Associated Works which do not automatically belong to a government agency or are transferred to a government agency, or a third party nominated by a government agency (whether on unleased land or the Crown lease land).[10]

However, in respect of Associated Works and Offsite Works which are not retained by Entity B and automatically belong to a government agency or are transferred to a government agency, or a third party nominated by a government agency (whether on unleased land or Crown lease land), the Associated Works and Offsite Works represent something that Entity A would usually or commercially pay money to acquire and have a measurable economic value.[11]

In the case of the Associated Works and Offsite Works which automatically belong to a government agency or are transferred to a government agency, or a third party nominated by a government agency, non-monetary consideration is provided for the supply of the Land.

Therefore, as Entity B will be making a taxable supply of the Associated Works and Offsite Works not retained by Entity B to Entity A, the requirements of a taxable supply under section 9-5 of GST Act will be satisfied as:

•           the supply will be for consideration provided by Entity A,

•           the supply will be connected with Australia because the Associated Works are supplied in Australia;

•           Entity B will be making a supply in the course of its enterprise;

•           Entity B is registered for GST

•           the supply will not be GST-free or input taxed

Consideration for the supply

As advised above, Entity A receives non-monetary consideration for the supply of Associated Works and Offsite Works that automatically belong to Entity A or an entity nominated by Entity A. Paragraph 11-5(c) is satisfied.

Registration for GST

Entity A is registered for GST. Paragraph 11-5(d) is therefore satisfied.

Conclusion

Entity A does not make a creditable acquisition for GST purposes for Building Works or Approved Development and Associated Works and Offsite Works that are retained by Entity B. However, Entity A makes a creditable acquisition for GST purposes for the Associated Works and Offsite Works that automatically belong to a government agency or are transferred to government agency, or a third party nominated by a government agency (whether on unleased or Crown leased land).

[1] Paragraph 37 of GSTD 2021/1.

[2] Paragraph 38 of GSTD 2021/1.

[3] See paragraph 80 of GSTR 2001/6.

[4] Paragraph 40 of GSTD 2021/1.

[5] See section 298 of the Planning and Development Act 2007 (ACT).

[6] See www.planning.act.gov.au/leasing-and-titles.

[7] Paragraph 44 of GSTD 2021/1.

[8] Paragraph 10 of GSTD 2021/1.

[9] Paragraph 12 of GSTD 2021/1.

[10] GSTD 2021/1 paragraphs 21 to 24

[11] GSTD 2021/1 paragraphs 25 to 27