Edited version of private advice

Authorisation Number: 1052128595775

Date of advice: 28 June 2023

Ruling

Subject: GST and government projects

Relevant facts and circumstances

X is registered for GST and with the Australian Charities and Not for Profits Commission as an Australian endorsed charity for GST purposes.

X is a bidder for the State Government (State) imitative to deliver social, affordable and specialist disability accommodation as part of an integrated community, including market value housing and commercial premises.

The documents that form part of this scheme are the Project Deed and the Ground Lease.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-5

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-10

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-15

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-40

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-75

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

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 38-250

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

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

Reasons for decision

Question 1

Will the grant of the lease and continued supply by the State to X be an input taxed supply of residential premises in accordance with section 40-35?

State will own the buildings and all fixtures.

X will have a right to receive rent under the lease of the premises once they are constructed on the land.

Subsection 40-35(1) provides that a supply of premises by lease, hire or license is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

Subsection 40-35(2) provides that the supply is input taxed only to the extent the premises are to be used predominately for residential accommodation (regardless of the term of occupation).

Guidance on whether premises are considered residential premises is provided in Goods and Services Tax Ruling 2012/5 Goods and Services Tax: residential premises (GSTR 2012/5).

In South Steyne Hotel Pty Ltd v. Commissioner of Taxation [2009] FCA [2009] FCAFC 155, the court held that each individual supply must be construed separately. The character of each supply was that of an individual apartment and not something similar to a hotel or motel. As such, the supply effected by each of the leases were input taxed.

In MBI Properties (Commissioner of Taxation v MBI Properties (2014) HCA 49), there was a supply which occurred at the time of entering into the lease. That supply involved a grant within section 9-10(2)(d) combined with the creation of contractual rights contemplated by section 9-10-(2)(e) and contractual obligations within section 9-10-(2)(g).

In addition to that, there will be at least one further supply that occurs progressively throughout the term of the lease. That supply occurs by the lessor observing the various covenants and particularly the covenant to quiet enjoyment.

"The thing of value the lessee thereby receives is a continuing use and occupation of the leased premises."

The High Court was quite explicit in MBI Properties that, based on this approach to analysing the supplies under a lease, it was wrong to apply section 40-35 as only applying (and by inference not applying) to the supply which occurs at the time of entering into the lease but not referring to the further supplies which occur by the lessor observing and continuing to observe the covenant of quiet enjoyment under the lease.

The residential premises will be affixed to the land, and following the principles from MBI Properties, the ongoing supplies made under that lease will be input taxed under section 40-35 by the State. The residential premises will return to the State at the end of the lease. As the supply of residential premises are input taxed, there is no GST payable on the supply.

Question 2

If the answer to Question 1 is "No", and the supply under the proposed lease is taxable, will the acquisition be a creditable acquisition by X pursuant to Section 11-5 of the GST Act?

As per Question 1, the supply of a lease of newly constructed residential premises will be an input taxed supply to X.

You make a creditable acquisition (section 11-5) 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

You are not entitled to an input tax credit for any acquisition that you make relating to the supply under the ground lease of newly constructed residential premises as it is input taxed and section 11-15(2)(a) precludes it from being for a creditable purpose.

Question 3

Will X provide any non-monetary consideration to the State for the granting of the ground lease in accordance with section 9-15 and 9-75 of the GST Act?

Section 9-15 of the GST Act provides that consideration includes:

•         any payment or any act or forbearance in connection with a supply of anything and

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

Further, a payment is not limited to a payment of money (paragraph 12 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: Goods and services tax: non-monetary consideration (GSTR 2001/6)).

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).

Paragraph 51 of GSTR 2001/6 provides that there are two elements to the definition of consideration.

Paragraph 71 of GSTR 2001/6 states that in determining whether a sufficient nexus exists between supply and consideration, regard should be to the true character of the transaction.

The consideration for a supply may be monetary or non-monetary or a combination of both.

Section 9-75 states that the GST is based on the GST inclusive market value of the property.

Paragraph 80 of GSTR 2001/6 provides that consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of supply. However, things such as acts, rights, and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from a transaction.

Paragraph 83 of GSTR 2001/6 provides that many transactions involve exchanging various rights and obligations between the parties to the transaction.

Paragraph 85 of GSTR 2001/6 provides that non-monetary consideration needs to have a clearly independent identity. Obligations that are essentially another way of describing the consideration do not have a separate existence.

Paragraph 86 of GSTR 2001/6 provides that particular terms that form part of a transaction need to go beyond merely defining or describing the supply or specifying rights that are to be retained by the entity making the supply, before the terms form a separate supply or additional consideration for a supply under the transaction.

It is considered the ground lease obligations do have an independent identity and go beyond merely defining or describing the supply of the ground lease by the State to X.

X will be required to construct the residential premises on the leased land to the standards set by the State and

then lease a portion of the individual premises to social housing tenants. This will allow the State to meet its social

policy objectives relating to social housing.

In addition to any nominal consideration, X does provide non-monetary consideration to the State in return for the grant of the ground lease.

The residential premises to be constructed by X on the land owned by the State will be constructed towards the start of the ground lease. Although those premises will be affixed to the land and are not required to be removed from the land at the end of the lease, X will only gain access to the premises at the end of the lease. Due to the ground lease, it is X that is able to derive any economic benefit from those premises during the lease term.

The value of the non-monetary consideration by X for the grant of the ground lease is considered to be nominal.

Question 4

Will the Grant by the State be consideration in regard to any supply?

The term 'grant' is not defined and the general principles of the GST Act apply in determining whether GST is payable on a grant transaction.

Goods and Services Tax Ruling GSTR 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/12) outlines the Commissioner's views on when a financial assistance payment is consideration for a supply made by the recipient of the payment.

Paragraphs 15 and 16 of GSTR 2012/2 states:

15. For a financial assistance payment to be consideration for a supply, there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. A financial assistance payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The test is an objective one.

16. Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether a financial assistance payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The surrounding circumstances may include the statutory purpose of the payer in providing the financial assistance, the activities which are to be undertaken by the payee and any other terms and conditions attached to the payment. However, none of these factors will be determinative on their own and the arrangement must the considered as a whole. The description the parties may give to the arrangement, whilst relevant, is not determinative.

In this case, the initial grant of the lease is clearly not a gift.

Paragraph 121 in GSTR 2012/2 states that in determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' other GST rulings take the view that:

•         the test whether there is a sufficient nexus between the supply and the payment made is an objective one;

•         regard needs to be had to the true character of the transaction; and

•         an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances of the transactions (Marac Finance Ltd v. Virtue [1981] 1 NZLR 586).

Paragraph 122 of GSTR 2012/2 conveys that an arrangement may be evidenced by:

•         written and oral contracts;

•         deeds, assignments and options;

•         licence and permit conditions;

•         applications;

•         legal instruments;

•         letters of offer (including departmental or ministerial correspondence to recipients);

•         memoranda of understanding; or

...

The State will provide financial assistance to X because it was the bidder for the State Program.

The performance or otherwise of these obligations under the deed forms part of the circumstances which determine whether X is entitled to the support payments. As such, X's performance of the obligations has a connection with the State making the payment to them because these obligations establish that X is entitled to the payment.

The provision of the financial assistance (grant) provided will not be consideration for a supply, as there isn't a sufficient nexus between the payment provided by the State and a supply made by X.

Question 5

Will the Quarterly Service Payments (QSP's) be additional consideration by X?

Consideration within the meaning of section 9-15 includes any payment, or any act or forbearance, in connection with a supply of anything and any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

The QSP's do not commence until the first quarter of the Operational Phase and are solely in regard to the services and not in connection with the delivery of the Development Activities to Commercial Acceptance/practical completion.

The QSP's have more a proximate connection with Xs performance of its obligations under the Project Agreements and are consideration for a separate supply which will be a taxable supply if all the requirements in section 9-5 of the GST Act are met.

Question 6

Will X be entitled to the input tax credits on the acquisitions made for the supply of ongoing maintenance, repair, modification or improvements as may be required during the Operational Phase of the Project in accordance with Division 11 of the GST Act?

Yes, X will be entitled to recover GST incurred on its acquisitions to the extent that each acquisition is a creditable acquisition (section 11-5) as defined in the GST Act.

Question 7

For the purposes of section 38-250 of the GST Act, are the supplies under the lease of residential premises to the Xs Trust a supply of "accommodation" under sub-sections 38-250(1)(b)(i)?

Subsection 9-30(3) provides that to the extent that a supply could be both GST-free and input taxed, the supply is GST-free unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed (section 40-35 does not require such a choice).

A supply of accommodation by a charity may be GST-free under section 38-250 if the consideration for the supply is less than 75% of either the GST inclusive market value of the supply section 38-250(1)(b)(i) or the cost of the supplier of providing the accommodation or section 38-250(2)(b)(i).

Subsection 38-250(1) states:

(1)  A supply is GST free if:

(a)  The supplier is an endorsed charity, a gift deductible entity or a government school; and

(b)  The supply is for consideration that:

(i)            if the supply is a supply of accommodation - is less than 75% of the GST inclusive market value of the supply or

(ii)          ...

X is an endorsed charity and a deductible gift recipient (subsection 38-250(1)(a) is met).

X will lease to Xs' Trust, the portion of the dwellings in each of the sites. In leasing those dwellings, X meets the definition of the supply of accommodation as illustrated in Melbourne Apartments and these supplies of accommodation by way of a lease will be GST-free under sub-section 38-250(1)(b)(i).

Question 8

For the purposes of Section 38-250, is a benchmark against private housing leases, on an arm's length basis by Xs Trust and of a substantially similar type and features would be an acceptable proxy for "market value" under that provision?

The term 'market value' is not defined in the GST law. However, GSTR 2001/6 provides guidance on determining market value to be:

(a) the market value of an identical good, service or thing;

(b) the market value of a similar good, service or thing;

(c) the market value of the supply; or

(d) the value given by a professional appraisal.

The timing of the valuation should be the period in which the supplier is required to account for the GST.

The ATO has also published "benchmark market values" that can be used to compare against the consideration received. Benchmark market values are amounts that we consider are reasonable GST inclusive market values for accommodation, board and quarters and meals.

A charity can use the benchmark market values if it supplies (amongst other things) supported accommodation and community housing (long term accommodation) or residential housing (long term accommodation).

Paragraph 44 of the Charities Consultative Committee, Non-commercial activities of charities, cost of supply and market value tests (CCC) (available on the ATO website) states that charities should take into account the following when making the comparison:

• identifying the market
• the locality of the supply or area of the market
• the quality or nature of supply
• the size, quantity or duration of supply
• the conditions of supply
• other charitable or commercial suppliers, and
• the number of comparisons.

The benchmark against private housing leases, on an arm's length basis of a substantially similar type and features would be an acceptable proxy for market value provided the requirements in paragraph 44 are considered.

Question 9

Is X entitled to the input tax credits on the creditable acquisitions (such as construction costs) made for the supply of the residential accommodation to affordable housing tenants and Xs' Trust where the consideration is less than 75% of the GST exclusive market value of the supply in accordance with Division 11 of the GST Act, on the basis that this supply is GST-free and not input taxed?

On the basis that X will lease individual premises (residential premises portion only) which are GST-free under subparagraph 38-250(1)(b)(i) of the GST Act, they will be entitled to claim input tax credits on construction and other related costs.