Edited version of private advice

Authorisation Number: 1052130541365

Date of advice: 28 June 2023

Ruling

Subject: GST - supplies, consideration and attribution

Question 1

Is Entity A making taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) under the Arrangement with Entity B?

Answer

Yes, Entity A will make taxable supplies pursuant to Contract 1 being:

•         entering into the obligation to grant Lease A; and

•         entering into an obligation to grant Lease B.

Furthermore, the supply of Leases A and B by Entity A under the Arrangement are taxable supplies under section 9-5, but only to the extent that they are not input taxed supplies of residential premises to be used predominantly for residential accommodation under section 40-35 of the GST Act.

Question 2

What is the consideration, within the meaning of section 9-15 of the GST Act, to be provided by Entity B for the taxable supplies made by Entity A (if any) identified in Question 1?

Answer

The consideration, within the meaning of section 9-15, to be provided by Entity B for the taxable supplies made by Entity A under the Arrangement is as follows:

• Entity B's obligations under Contract 1
• Rent as calculated in accordance with Leases A and B
• The Development Sum payable under Contract 2
• The Facilities as provided for under Contract 2
• Reimbursement of costs of the Ancillary Works pursuant to Contract 2
• Transfer of ownership of the retirement village pursuant to Leases A and B.

Question 3

How should the GST payable for the taxable supplies identified in Question 1 (if any) be attributed under Division 29 of the GST Act?

Answer

With respect to taxable supplies made by Entity A under Contract 1 and Leases A and B - any GST payable by Entity A should be attributed in accordance with paragraph 5 of Goods and Services Tax: Particular Attribution Rules Where Total Consideration is Not Known Determination 2017 (PAR 2017/8).

With respect to the taxable supplies made by Entity A under Contract 2 - The GST payable by Entity A in regard to its supply of entering into the obligation to enter/grant Lease B is attributable under the basic rules in subsection 29-5(1).

Relevant facts and circumstances

Entity A is registered for GST and accounts for GST on a non-cash basis.

Entity A owns real property (the Land) known as:

•         Lot 1; and

•         Lot 2.

Entity B is registered for GST effective from dd/mm/yyyy and member of a GST group. Entity B accounts for GST on a non-cash basis.

Entity C is the GST Group representative member.

Entity B had sought to acquire land and develop a retirement village on that land and had identified the Land owned by Entity A.

Entity A and Entity B have entered into agreements encompassing two Contracts (Contracts 1 and 2) and two leases (Leases A and B) (hereafter the Arrangement) which will broadly entail the following:

• With respect to Entity A:
  • Entity A will lease the Land to Entity B for xx years, done in two tranches (Leases A and B)
  • Entity A will undertake the Ancillary Works under Contract 2
• With respect to Entity B:
  • Entity B will comply with its obligations under Contract 1 that are conditions precedent to being granted Lease A
  • Entity B will pay Rent to Entity A for its tenancy of the Land calculated under the terms of Leases A and B
  • Entity B will build a retirement village on the Land over stages and operate the village in accordance with the terms of Leases A and B
  • Entity B will build Facilities for Entity A in accordance with the terms of Contract 2. Completion of Contract 2 triggers the commencement of Lease B
  • Entity B will pay Entity A, a sum of money (the Development Sum) in two tranches under Contract 2.
  • Entity B will pay a reimbursement for the Ancillary Works under Contract 2 (the Ancillary Works Costs)

•         In regard to the construction and operation of the retirement village, the village will consist of multiple buildings that are to be constructed on the Land supplied under Leases A and B across three stages.

Contract 1

There are a number of obligations that need to be satisfied under Contract 1 before Entity A will grant the lease to Entity B including:

• Entity B undertaking and being satisfied, in its absolute discretion, a Development Review
• Entity A and Entity B agreeing to the Development Documents which include the Design Documents pertaining to the proposed Facilities
• Entity B obtaining the Development Approvals (as defined) on conditions satisfactory to Entity B and Entity A
• Entity B obtaining the Works Approvals on conditions satisfactory to Entity B and Entity A
• Registration of Plan of Subdivision.

Under Contract 1, Lease A will commence following the completion of the obligations under Contract 1.

Contract 1 also specifies that Lease B will commence x days after the date of practical completion of the Project specified in Contract 2.

Contract 2

Contract 2 primarily provides for a supply by Entity B to Entity A of goods and services to achieve the end result of the completion of the 'Project' as defined (construction of the Facilities, being facilities separate to the construction of the retirement village). It also provides for the arrangements for Entity B paying the Development Sum, and Entity A undertaking the Ancillary Works and being reimbursed for those Works by Entity B in the form of the Ancillary Works Costs.

Lease A

Under Lease A, Entity A leases the Land to Entity B and Entity B takes the Land for the Lease Term (xx years) on the terms and conditions contained in the Lease.

Entity B is required, among other things, under Lease A:

•         pay Rent for each Rent Period during the lease Term in accordance with the terms of Lease A

•         construct a retirement village in stages, to be operated by Entity B during the Term, in accordance with the terms of Lease A

•         pay all outgoings in accordance with the terms of Lease A.

Entity B must construct the retirement village at its own cost and retains ownership of the village (or the parts thereof during its construction) while Lease A is in effect. The construction of the retirement village will be done in three stages (Stages 1, 2 and 3)

At the end of the Term, and where Lease A is terminated before the expiry of the Term, ownership of the retirement village (or parts thereof if incomplete) passes to Entity A. Entity B is not entitled to compensation in the event this occurs.

In the event Contract 2 is terminated lawfully, Lease A also terminates.

Lease B

Lease B is a continuation of the lease of the Land under similar terms and conditions of Lease A.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9

A New Tax System (Goods and Services Tax) Act 1999 Division 11

A New Tax System (Goods and Services Tax) Act 1999 Division 19

A New Tax System (Goods and Services Tax) Act 1999 Division 29

A New Tax System (Goods and Services Tax) Act 1999 Division 99

A New Tax System (Goods and Services Tax) Act 1999 Division 156

Goods and Services Tax: Particular Attribution Rules Where Total Consideration is Not Known Determination 2017

Reasons for decision

In this ruling,

• 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

Is Entity A making taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 under the Arrangement with Entity B?

Section 9-5 provides that you make a taxable supply 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 (Australia); 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.

On these facts we consider:

• any supplies made by Entity A under the Arrangement will be in the course or furtherance of it operating its enterprise
• any supplies made by Entity A under the Arrangement will be connected with Australia as the supplies are done in Australia
• Entity A is registered for GST.

Therefore paragraphs 9-5(b) to (d) are satisfied. It remains to be determined whether Entity A is making supplies for consideration within the meaning of paragraph 9-5(a), and whether any of those supplies would be GST-free or input taxed.

The meaning of the term 'supply' for GST purposes is contained in section 9-10 as 'any form of supply whatsoever' (subsection 9-10(1)).

Subsection 9-10(2) provides that without limiting subsection 9-10(1), the term 'supply' includes:

(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;

(g)  an entry into, or release from, an obligation:

                    (i)        to do anything; or

                   (ii)        to refrain from an act; or

                  (iii)        to tolerate an act or situation

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

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) 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 relevant propositions on these facts 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 7: An entity cannot make a supply to itself

The supplies made under each of the agreements under the Arrangement will now be examined.

Contract 1

In this case, upon Entity B fulfilling its obligations under Contract 1, Entity A entered into Lease A effective from dd/mm/yyyy. Therefore, we conclude that Entity A is making a supply of the obligation to grant Entity B separate leases over adjoining land (Lease A and Lease B) under Contract 1. This supply is made for consideration provided by Entity B.

Contract 2

Whilst Entity A undertakes an obligation to do a number of things, in our view, the primary obligation of Entity A is to undertake or procure others to undertake the Ancillary Works. The Ancillary Works are works undertaken by Entity A on its own land. The Ancillary Works do not involve anything passing from Entity A to Entity B. The Ancillary Works are not a supply by Entity A, and consequently will not be a taxable supply under section 9-5.

Lease A

In regard to the supply of the Premises under Lease A, Division 156 contains special rules for entities that account for GST on a non-cash or accrual basis which effectively treats supplies (or acquisitions) that are made on a periodic or progressive basis as separate supplies.

A supply or acquisition is made on a periodic basis, or for a period, when it is made over a specified length of time or for a time with an identifiable end point and is made on a continuous basis until the stipulated end point occurs, or the period expires.

Section 156-22 states:

156-22 Leases etc. treated as being on a progressive or periodic basis

For the purposes of this Division, a supply or acquisition by way of lease, hire or similar arrangement is to be treated as a supply or acquisition that is made on a progressive or periodic basis, for the period of the lease, hire or arrangement.

Goods and Services Tax Ruling GSTR 2000/35; Goods and services tax: Division 156 - supplies and acquisitions made on a progressive or periodic basis (GSTR 2000/35) contains further discussion on specific circumstances in which Division 156 applies. Paragraphs 58 through 62 of GSTR 2000/35 state:

Leases

58. For GST purposes, a supply or acquisition by way of lease is treated as a periodic or progressive supply or acquisition to which Division 156 applies.

59. Division 156 has the effect of treating each periodic or progressive component of the lease as if it were a separate supply or acquisition which must then be accounted for in accordance with the attribution rules contained in sections 29-5 and 29-10.

60. Whether or not a particular lease document is an invoice for GST purposes, Division 156 may still apply, provided the other conditions are satisfied. This means that, when you enter into a lease and Division 156 applies, you do not attribute the GST payable or the input tax credits to which you are entitled for the entire period of the lease to the tax period in which you sign the lease agreement.

61. In the absence of an invoice, the GST payable or input tax credits relating to a specific component of a supply or acquisition by way of lease are attributed to the tax period in which the periodic or progressive payment for that particular component is provided or received. However, if a separate invoice for a particular component is issued prior to payment, then the GST or input tax credits in respect of that component are attributed to the tax period in which the invoice is issued.

62. Where a lease agreement includes clauses requiring payments to be made to the lessor for items such as electricity, maintenance, etc., (outgoings clauses), the payments, in respect of these items, are part of the periodic or progressive payments subject to Division 156.

In accordance with the above, we consider Lease A to constitute a periodic supply. The supply of the Land in accordance with Lease A relating to a Rent Period is to be considered as a separate supply for GST purposes with the GST classification for each Rent Period considered separately.

In your application you make reference to Federal Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 (MBI Properties). French CJ, Hayne J, Kiefel J, Gageler J and Keane J [at 35 - 38] discuss the following:

35. A transaction which involves a supplier entering into and performing an executory contract will in general involve the supplier making at least two supplies: a supply which occurs at the time of entering into the contract, in the form of both the creation of a contractual right to performance and the corresponding entering into of a contractual obligation to perform; and a supply which occurs at the time of contractual performance, even if contractual performance involves nothing more than the supplier observing a contractual obligation to refrain from taking some action or to tolerate some situation during a contractually defined period.

36. That general observation applies as much to a lease as to another executory contract. There will in general be a supply which occurs at the time of entering into the lease. That supply will involve a grant within the scope of s 9-10(2)(d) combined (as contemplated by s 9-10(2)(h)) with the creation of contractual rights within the scope of s 9-10(2)(e) and with the entry into contractual obligations within the scope of s 9-10(2)(g). There will then be at least one further supply which occurs progressively throughout the term of the lease. That supply will occur by means of the lessor observing and continuing to observe the express or implied covenant of quiet enjoyment under the lease. The thing of value which the lessee thereby receives is continuing use and occupation of the leased premises. The special attribution rule in s 156-5, made applicable to a supply by way of lease by s 156-22, does not alter those aspects of the general operation of the GST Act.

37. In observing and continuing to observe the express or implied covenant of quiet enjoyment under the lease, the lessor is appropriately characterised, for the purposes of the GST Act, as engaging in an "activity" done "on a regular or continuous basis, in the form of a lease". The result is that, whether or not the lessor might also be engaged in some other form of enterprise, the lessor makes the supply of use and occupation of the leased premises in the course of the lessor carrying on an enterprise as defined in s 9-20(1)(c).

38. Once the general operation of the GST Act is understood in that way, it is apparent that there is no warrant in the text or policy of the GST Act for reading the reference in the special rule in s 40-35 to a supply of "residential premises" that is a supply "by way of lease" as referring to the supply which occurs at the time of entering into the lease but not as referring to the further supply which occurs by means of the lessor observing and continuing to observe the express or implied covenant of quiet enjoyment under the lease. The reference encompasses both, and both are therefore input taxed.

We acknowledge that in entering into Lease A Entity A will be making multiple supplies including:

• granting the lease to, and supplying the Land to Entity B the use of the Land for the period of the lease;
• the creation of rights as detailed in the lease; and
• entering into certain obligations as contractually set out in the lease.

The supply of the Land pursuant to Lease A will encompass all of the above supplies.

It is also our view that under Contract 1, Entity A has made a separate supply of entering into an obligation to grant Lease A. This is a separate and distinct supply to that made by Entity A for the supply of the Land as granted under Lease A. This issue is further discussed in the reasoning of Question 2 below.

None of the supplies made by Entity A are GST-free. It remains to be determined to what extent Entity A's supplies are taxable or input taxed. This is discussed below.

To what extent are Entity A's supplies under the Arrangement taxable or input taxed?

On these facts partial development of the retirement village under Lease A will be carried out in Stage 1 consisting of the construction of Stage 1 buildings. Following the practical completion of Stage 1 buildings, Stage 1 will be operational and used for the purposes of providing accommodation to retirement village residents. From the date of commencement of Lease A, the relevant land being the subject of Lease A is vacant land (not residential premises) and the supply by Entity A would not constitute an input taxed supply of residential premises or residential accommodation. Therefore, the supply under Lease A up until this point would be a wholly taxable supply.

Upon completion of the development of the retirement village the relevant land being the subject of Lease A will constitute 'residential premises' as defined for GST purposes and the supply by Entity A from this point would be a wholly input taxed supply pursuant to section 40-35. Paragraph 243 of Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) clarifies this stating in part '... Retirement village living units are residential premises to be used predominantly for residential accommodation based on their physical characteristics...'.

In between the completion of the Stage 1 buildings and the completion of the retirement village in its entirety, the supply by Entity A of the Premises under Lease A will be an input taxed supply of residential premises to the extent that the land is used as a retirement village; the remainder of the supply of the Premises will be a taxable supply.

Lease B

For the purposes of the supply by Entity A of land being the subject of Lease B, the same principles will apply as discussed above in relation to Lease A. Lease B will also be a taxable supply to the extent that the supply of the Land does not constitute the supply of a retirement village (or any of the completed Stages), and Division 156 will apply whereby the supply will be a periodic supply of the Land.

It is also our view that under the Contract 1, Entity A has made a separate supply of entering into an obligation to grant Lease B. This is a separate and distinct supply to that made by Entity A for the supply of the Land as granted under Lease B. This issue is further discussed in the reasoning of Question 2 below.

Question 2

What is the consideration, within the meaning of section 9-15 of the GST Act, to be provided by Entity B for the taxable supplies made by Entity A (if any) identified in Question 1?

The term 'consideration' is defined in section 9-15 to include:

(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.

Paragraph 12 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (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.

In the first instance we will identify the consideration provided under each of the various agreements. Subsequently we will discuss the nexus between the consideration and the relevant supply made by Entity A.

Contract 1

Contract 1contains a number of obligations on both parties in preparation for the subdivision (or reconfiguration of boundaries) of the Land and the construction and operation of the retirement village and the Facilities.

Entity B also had further obligations under Contract 1which involved carrying out duties related to:

• obtaining 'Development Approvals';
• obtaining 'Works Approvals';
• procurement of the Plan of Subdivision.

We consider the further non-monetary obligations above fall within the definition of 'consideration' for GST purposes.

Lease A (and Lease B)

Lease A and Lease B require payment of Rent for the Term. This is consideration within the meaning of section 9-15.

In addition, Leases A and B require Entity B to pay outgoings in accordance with the terms of those Leases. Goods and Services Determination GSTD 2000/10; Goods and services tax: are outgoings payable by a tenant under a commercial property lease part of the consideration for the supply of the premises? discusses at paragraph 2 that the consideration for the supply of premises by a landlord includes amounts which are paid by the tenant under the terms of the lease:

• to the landlord for amounts for which the landlord is liable; or
• directly to a third party where the payment is in satisfaction of the landlord's liability.

Paragraph 6 of GSTD 2000/10 continues stating:

6. Other obligations imposed under the lease for the tenant to reimburse the landlord, or pay costs for which the landlord is liable, will also form part of the consideration for the supply of the premises. Examples are insurance, promotional levies, and reimbursement of the landlord's costs of repairs and maintenance. If the tenant is liable for an expense regardless of the terms of the lease, the payment of the expense will not form part of the consideration for the supply of the premises.

Whilst GSTD 2000/10 is written in the context of a commercial property lease, the principles will apply equally to a residential lease or a lease of vacant land.

Given the above we consider the outgoings payable under Leases A and B will constitute consideration as defined in section 9-15.

Leases A and B provide for the transfer of the retirement village (or part thereof) from Entity B to Entity A in the circumstances outlined in the facts.

The effect of this results in Entity B providing Entity A with all of the things necessary (apart from the land already owned by Entity A) to continue the operation of an existing enterprise, being the operation of a retirement village. We consider these obligations will also fall within the scope of consideration provided by Entity B.

Contract 2

Entity B's obligations under Contract 2 fall within the definition of 'consideration' (both monetary and non-monetary), for GST purposes being:

• Development Sum
• Construction of the Facilities
• Reimbursement of Ancillary Works Costs.

The provision of these things by Entity B constitutes something of economic value in connection with Entity A's supplies generally, as identified in Question 1.

One of the issues in this case as discussed above is identifying a nexus between any consideration and a relevant supply. That is, are the obligations of Entity B discussed above, consideration for a supply by Entity A of the Land under Lease A and/or Lease B, or consideration for another supply.

Lease premiums

GSTR 2000/35 recognises at paragraphs 68 to 73 that a payment of a 'genuine lease premium' is consideration paid by a lessee to the lessor for the grant of the lease whereas 'rent' is a payment made by the lessee to the lessor for the use of the property leased.

For GST purposes, a lease premium is consideration for a supply or acquisition which is separate from the supply or acquisition of the leased property under the lease. The test of whether an amount is a genuine lease premium is an objective test. Paragraph 71 of GSTR 2000/35 states:

It is a question of fact whether a particular amount paid by a lessee to a lessor is rent or a lease premium. If the terms of the lease agreement show that the amount paid is for use of the property rather than consideration for the grant of the lease, then the amount will be rent and not a lease premium. This will be so irrespective of how the parties describe the amount.

Paragraph 72 of GSTR 2000/35 continues describing that if you make a supply or acquisition the consideration for which is a lease premium, Division 156 will not apply even if the consideration is payable by instalments - it is a single supply or acquisition. The grant of a lease is not a supply or acquisition for a period or on a progressive basis.

Goods and Services Tax Ruling GSTR 2003/16; Goods and services tax: inducements to enter into a lease of commercial premises contains further discussion in relation to the concept of a lease premium with the Commissioner's view on how inducements provided by a landlord (lessor) or a tenant (lessee) for the entry, or agreement to enter, into a lease of commercial premises is treated for GST purposes. Whilst the discussions in GSTR 2003/16 are in the context of leasing commercial premises, the principles discussed will apply equally to the lease of residential premises (paragraph 115 of GSTR 2003/16).

For the purposes of GSTR 2003/16, the term 'lease premium' is defined as 'a sum of money or other consideration given for the grant of any lease. A genuine lease premium is an additional amount of consideration given by a lessee over and above the rent to obtain the grant of the lease of the premises' (paragraph 116 of GSTR 2003/16).

Paragraph 19 of GSTR 2003/16 recognises that 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.

Paragraphs 22 - 24 of GSTR 2003/16 state:

22. The application of GST will need to be considered separately where there is:

•         a lease incentive, which is consideration paid by the landlord for a supply made by the tenant of entry into a lease, or agreement to enter into a lease; or

•         a lease premium, which is consideration paid by the tenant for a supply made by the landlord of entry into a lease, or grant of a lease which is separate from the consideration (rent) for the supply of the premises.

23. In either case there may be two separate supplies made for consideration. For example, there may be a taxable supply of the entry, or agreement to enter, into a lease in respect of commercial premises and a separate taxable supply of the leased premises themselves. While there may be two separate supplies, they may both have the same GST treatment as taxable supplies.

24. The concept that a lease inducement is consideration for something different to the lease of the premises was discussed by Beaumont J in Selleck v. FC of T.11 Beaumont J stated:

The payment is an inducement to a prospective tenant to enter into the leasing transaction. As a separate and collateral arrangement, the agreement to pay this premium or incentive stands apart from, and necessarily precedes, the operation of the lease itself. In conveyancing terms, the incentive payment is an incident of the agreement for lease, rather than of the lease instrument itself ... the amount is, I think, paid as a 'price' for the grant of the lease; it is a premium in that sense (see Chelsea Investments Pty Ltd v. FCT (1966) 115 CLR 1 per Windeyer J at 8). It is the 'purchase money which the [prospective lessee or prospective lessor] pays for the benefit which he gets under the lease' (see King v. Earl Cadogan [1915] 3 KB 485 per Warrington LJ at 493; Nixon v. Doney (1961) SR (NSW) 311 at 316).

Paragraph 29 of GSTR 2003/16 provides in part:

'... factors that are relevant in considering whether a payment, or other consideration, is consideration for a separate supply made by the landlord or by the tenant include:

•       whether the payment or other consideration is required by the contract to be paid or provided to a third party. If so, this may suggest it is consideration for a supply made by the third party, such as procuring the other party to enter, or agree to enter, into the lease;

•       whether the payment is to be fully or partly rebated if the lease is terminated early or in case of a certain event occurring, for example, destruction of the premises. If so, this may suggest it is rent by another name;

•       where the payment or other consideration is required to be provided by instalments or progressively over a period, whether there is provision for cessation of the payments or other consideration if the lease is terminated early. If so, this may suggest the payment is rent for the lease of the premises;

•       where the parties agree any outstanding balance or other consideration will become immediately due in the event of early termination, which may, for instance, tend to distinguish the consideration from rent;

•       the fact a party would not have entered into a lease but for the inducement;

•       the description the parties give to the payment or other consideration in their written contract.'

Paragraphs 102 to 104 state:

102. The Full Federal Court in FC of T and Krakos Investments Pty Ltd 46 characterised a lease premium as follows:

A sum will be a premium where it is paid as consideration for the grant of a lease. The expression is used in contradistinction to rent, which is the consideration payable under the lease for the right of use and occupation of the leased premises during the term of the lease:....

103. In Frazier v. Commissioner of Stamp Duties (NSW) the Court stated:

...the whole of the circumstances must be looked at, for the question to be decided is whether in fact - and this involves the construction of the deed as well as other relevant evidence if any - this amount was paid as a consideration for the granting of the lease or whether it is a payment intended as rent for the use of the premises.

104. Whether a payment to a landlord by a prospective tenant is rent or a lease premium must be determined in light of the surrounding facts and circumstances...

The issue of whether, in the context of a lease, a payment is properly classified as a premium or rent has been considered in numerous court cases:

• '... 'premium' as I understand it, ...represent, the capital value of the difference between the actual rent and the best rent that might otherwise be obtained...'. 1
• '... To my mind, there is a real distinction between such a requirement as a condition precedent to the grant of a tenancy (on any terms) on the one hand, and on the other hand, the provision in the lease or contract of tenancy for payment of some lump sum by way (as in the present case) of compounding of rent and in addition to the periodic rent.'2
• 'In this view of it, a premium is a 'personal promise in consideration of the lease being granted' (Hill v. Booth per Scrutton L.J.), as distinct from rent which is a payment for the use of the land'3
• ''... in modern law, rent is not conceived of as a thing, but rather as a payment which the tenant is bound by his contract to make to his landlord for the use of the land.'4

Application of GSTR 2003/16 to the current arrangement

In our view, the consideration payable by Entity B pursuant to Leases A andB together with the obligations to be undertaken by Entity B under Leases A and B have the sufficient nexus between those payments and the supply of the Land under the respective Leases. We consider these payments and obligations explicitly provided for in the Leases to be correctly described as 'rent' for the supply by Entity A of the use of the Land.

The issue at hand is whether the consideration payable under Contract 1(non-monetary) and Contract 2 (Development Sum, non-monetary value of building the Facilities and the Ancillary Works Costs) is:

• provided to induce Entity A into agreeing to enter Lease A and/or Lease B with Entity B; or
• provided as consideration for Entity A granting Lease A and/or Lease B; or
• provided as consideration (together with the 'rent' payable under the respective Leases) for the use of the Land (supply of the Premises).

Contract 1 - consideration and nexus to a supply

In this case, Entity B fulfilling its obligations under Contract 1 is the trigger to Entity A granting Lease A.

We take the view that the consideration provided by Entity B pursuant to Contract 1 is provided for Entity A undertaking to grant Lease A. That is, the obligations Entity B perform under Contract 1is consideration for Entity A entering into the obligation to grant Lease A.

Contract 2 - consideration and nexus to a supply

In this case the consideration payable under Contract 2 is provided in a number of forms and payable, in part, in instalments (Development Sum) and progressively (in the form of the construction of the Facilities and reimbursement of Ancillary Works undertaken by Entity A).

Pursuant to Contract 1, the trigger for Lease B being granted is the practical completion of the Project in accordance with Contract 2.

That is, Entity A becomes obliged to grant Lease B upon Entity B completing the design and construction of the Facilities.

Contract 2 provides that in the situation Lease A is terminated the consideration payable will cease as:

• Entity B will no longer be required to complete the Project Works
• Entity B will no longer be required to pay any unpaid portion of the Development Sum
• Entity B will not be required to make further reimbursements for Ancillary costs
• Entity A will not be required to grant Lease B.

Contract 2 does not require Entity A to provide any compensation to Entity B for Project Works carried out to date prior to the termination of the Lease. Nor does Contract 2 provide for the repayment of any portion of the Development Sum paid or Ancillary Works reimbursements paid prior to termination. This means Entity A will take the benefit of those Project Works and the Development Sum and Ancillary Works reimbursement in the event of Contract 2 terminating.

Following the commencement of Lease A and Lease B, whilst there will be a period of time until Entity B will be required to make any payment of rent under the terms of the Leases, we consider Entity B will have a potential liability to make rental payments from the commencement dates of the respective Leases. The obligation to pay rent under the Lease is an enduring obligation that lasts throughout the term of the Lease, to be paid as and when it falls due for each defined Rent Period. The rent functions as the provision of consideration for the exclusive possession and use and quiet enjoyment of the Land during the Lease Term.

It is also acknowledged that the fact an amount payable under a lease agreement as a lump sum does not disqualify that amount from having the nature of rent (typically in advance) as found in Frazier v. Commissioner of Stamp Duties (N.S.W.) 85 ATC 4735.

Further to the previous discussion above in regard to MBI Properties, and with reference to the parties' ruling application in describing a supply of property by way of lease containing multiple supplies (executed demise being the initial grant of the lease and executory contract being the performance of subsequent obligations pursuant to the lease), we note that typically, as in MBI Properties, such supplies form part of a single contract or agreement.

Also as discussed above, we acknowledge that in entering into Lease A and Lease B Entity A will be making multiple supplies. However, we consider an important point of difference in this case is the existence of a separate agreement (Contract 2) containing separate and distinct obligations outside of those obligations contained in Lease A and Lease B.

Whilst we acknowledge the agreements entered into under the current Arrangement are interdependent whereby in the event one agreement is terminated triggers the termination of the other, each agreement has a separate function and provides a distinct component of the Arrangement. Each agreement, therefore, should be considered on its own merits.

The consideration payable under the terms of Lease A and Lease B ('rent') is explicitly stated in the respective leases without reference to the consideration payable by Entity B as detailed in Contract 2 and therefore we consider any consideration payable pursuant to Contract 2 does not have a connection to the supply of the Premises under the terms and conditions of Lease A and/or Lease B.

We are of the view that the Arrangement as a whole would have been taken into account by both parties prior to entering the Arrangement and it is arguable Entity A would not have committed in the absence of the incentive provided for under Contract 2. The incentives provided for under Contract 2 do not compensate Entity A for the lease and use of the Land, as such an interpretation is not found in the terms of Leases A and B. It is clear, therefore that the parties entered into Contract 2 to provide a benefit for Entity A above and beyond mere rent for the occupation and use of the Land

In light of the above discussion, we consider that the consideration paid by Entity B to Entity A as detailed in Contract 2, is a lease premium as referred to in GSTR 2003/16.

The lease premium payable as provided for in Contract 2 is consideration for a supply by Entity A of entering into the obligation to grant Lease B to Entity B in addition to the Contract 1 lease premium discussed above. This is a separate supply to the supply of the granting of the lease and supply of the premises by Entity A under Lease B.

Question 3

How should the GST payable for the taxable supplies identified in Question 1 (if any) be attributed under Division 29 of the GST Act?

Supply of the Premises pursuant to Lease A

As discussed in Question 1 above, the supply of the Premises pursuant to Lease A is a periodic or progressive supply in accordance with section 156-22.

Subsection 156-5(1) provides that GST payable on such periodic or progressive supplies is attributable in accordance with section 29-5 (the basic attribution rules), as if each progressive or periodic component of the supply were a separate supply.

Subsection 156-5(2) provides that if the progressive or periodic components of such a supply are not readily identifiable, the components correspond to the proportion of the total consideration for the supply that the separate amounts of consideration represent.

Also as discussed at Question 1, we consider the progressive or periodic components of the supply of the Premises are each respective year commencing on 1 July and ending on the following 30 June (except for the first and last periodic components of Lease A).

Entity A accounts for GST on a non-cash basis. Therefore, the basic rule contained in subsection 29-5(1) provides that GST payable is attributed in the earlier tax period in which any of the consideration is received for the supply, or an invoice is issued relating to the supply.

Under section 29-25, the Commissioner may make a determination which varies the basic attribution rules contained in section 29-5 and section 29-10. Pursuant to paragraph 29-25(2)(e), the Commissioner has issued Goods and Services Tax: Particular Attribution Rules Where Total Consideration is Not Known Determination 2017 (PAR 2017/8).

PAR 2017/8 applies to entities that account for GST on a non-cash basis where:

(a)  you do not know the total consideration when any part of the consideration is paid or received or when an invoice is issued relating to the supply or acquisition, and

(b)  the ascertainment of the total consideration depends on a future event or events that is not entirely within your control, and either:

(c)   an invoice is issued relating to the supply or acquisition, or

(d)  any consideration is received or paid for the supply or acquisition.

In this case, the consideration payable pursuant to Lease A is not expressed as a fixed amount for a period as is the case in a typical lease. The 'rent' comprises amounts which are determined primarily on the timing and actions of a third party (residents leaving the retirement village, third party services, etc).

We consider the circumstances in this case in regard to the periodic supplies of the premises in accordance with Lease A and the consideration payable for that supply fall within the scope of PAR 2017/8. Therefore, the GST payable by Entity A on its supply of the premises will be attributed in accordance with paragraph 5 of PAR 2017/8. Any input tax credit will be attributed by Entity B pursuant to paragraph 6 of PAR 2017/8 (subject to the basic rules of entitlement under Division 11).

Goods and Services Tax Ruling GSTR 2000/29; Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25 (GSTR 2000/29) contains additional discussion in regard to the Commissioner's determination pursuant to paragraph 29-25(2)(e) at paragraphs 92 - 98 (and also paragraphs 147 - 171). Paragraph 98 (and paragraph 171) of GSTR 2000/29 provide that attribution rules in PAR 2017/8 do not alter the application of Division 156 and operate in respect of each separate periodic supply.

Subject to the above is the GST character of the periodic separate supplies of the retirement village. In the case a separate periodic supply of the retirement village is a taxable supply or mixed supply, PAR 2017/8 will apply. However, where the periodic supply of the retirement village is an input taxed supply, GST will not apply to the supply and therefore GST will not be attributed in regard to that separate periodic supply.

Supply of the Premises pursuant to Lease B

The above principles will apply to the attribution of the GST payable for the supply of the premises pursuant to Lease B.

Supply by Entity A of entering into the obligation to enter Lease A with Entity B

As discussed above, we are of the view that the consideration payable in respect to the supply by Entity A of entering into the obligation to enter/grant Lease A is detailed in Contract 1.

As discussed previously, pursuant to Contract 1, Entity B will provide non-monetary consideration in performing a number of obligations in respect of the supply by Entity A of entering into the obligation to grant Lease A.

In this case Entity A accounts for GST on a basis other than cash (non-cash basis). Subsection 29-5(1) provides that the GST payable in such cases is attributable to the earlier tax period in which:

(a)  any of the consideration is received for the supply; or

(b)  an invoice is issued relating to the supply.

Generally, it would be the case that upon Entity B initially performing any obligation as required under Contract 1would trigger the GST payable being attributed in the tax period that first obligation is performed. However in this case, we consider that at the time Entity B does begin to carry out it's obligations, the total consideration payable in relation to the supply would be unknown to either Entity A or Entity B.

Therefore, we consider the particular attribution rules as set out in PAR 2017/8 (as discussed above in relation to the GST payable in regard to the supply of the premises under Lease A and Lease B respectively) will apply in relation to the attribution of the GST payable for the supply made by Entity A of entering into the obligation to grant Lease A.

Supply by Entity A of entering into the obligation to enter Lease B with Entity B

Pursuant to Contract 2the consideration payable by Entity B comprises multiple components:

• monetary consideration of $x (Development Sum)
• non-monetary consideration being the market value of the Facilities
• monetary consideration being the reimbursement of the Ancillary Works Costs

It is your contention that each of the above components are to be considered separately in determining attribution. That is:

• attribution in respect of the Development Sum is to be attributed pursuant to the basic rules in subsection 29-5(1) and subsection 29-10(1).
• attribution in respect of the Facilities is to be attributed pursuant to PAR 2017/8
• attribution in respect of the reimbursement of the Ancillary Works Costs is also to be attributed in accordance with PAR 2017/8.

In determining the GST payable on a taxable supply, section 9-70 and section 9-75 make reference to the 'value' and 'price' of a supply. Whilst the 'price' may consist of different components (monetary and non-monetary), the 'value' of a supply is expressed as a single amount (subsection 9-75(1)) with the GST payable being 10% of the 'value' (section 9-70).

Furthermore, subsection 29-5(1) and subsection 29-10(1) do not accommodate for different attribution points in time for consideration that comprises separate components.

We have considered the application of PAR 2017/8 however do not believe attribution under the Commissioner's determination pursuant to paragraph 29-25(2)(e) is appropriate given the circumstances of this case.

The first point to make is that paragraph 29-25(2)(e) is not a 'looking into the future' kind of provision. Paragraph 29-25(2)(e) requires an assessment of what the parties 'know' in regard to 'the total consideration' when the arrangement is entered into by reference to the terms of the arrangement entered into.

The word 'knows' is an ordinary English word having a variety of senses or meanings. Ordinary words are normally subject to gradations of meaning, something which is recognised specifically in relation to the word 'know' by the High Court in a hit-and-run case, Vines v Djordjevich. The context there was that the victim give notice to the nominal defendant as soon as possible 'after he knew that the identity of the motor vehicle could not be established'. The court said:

The word "know" is used in the provision in an ordinary sense, without any intention that it should be analyzed or refined upon. But of course there are gradations of knowledge or belief upon such a matter. The gradations extend from a slight inclination of opinion to complete assurance. Here it seems to amount to an awareness or consciousness that no reasonable probability exists of ascertaining the identity of the car satisfactorily or with any certainty. Complete assurance is by no means necessary.

This notion is explored further in an article titled Proof and Suspicion as follows:

There can be no denying (in law anyhow) that there are degrees of positiveness of persuasion that the human mind can reach. One may be persuaded of the existence or otherwise of a fact absolutely or barely. The probability of its existence may decline from the highest degree 'by an infinite number of gradations, until it produces in the mind nothing more than a mere preponderance of assent in favour of [it]'. There is nothing essentially incongruous about a state of mind which, while having reservations or doubts, is persuaded on balance about a fact.

The precise meaning the word 'knows' takes in paragraph 29-25(2)(e) depends on context considered in the 'widest sense'. That context includes the immediate attribution provisions in Division 29, the GST law as a whole and its scheme of operation. Context also extends, where it is relevant, to extrinsic materials, legislative history and the mischief to which the provisions in question are addressed.

An important contextual factor is that the GST law expressly recognises that consideration will often change over the life of a commercial arrangement (for reasons which include party choices), and that suppliers are to deal with these events in their attribution of adjustments at the time the change occurs (Division 19).

The first Macquarie meaning of the word 'know' is 'to perceive or understand as fact or truth, or apprehend with clearness and certainty'. In our view there is nothing in the statutory context or anywhere else which would incline a court to adopt some other meaning. Mere suspicion would not be enough, but neither would complete assurance be necessary. In the end, a commercial party as a supplier having GST reporting obligations will be taken to know that what an orthodox and informed interpretation of its own arrangements produces.

Paragraph 29-25(2)(e) does not require you to 'know' something which will, may or may not occur in the future. What is required in considering the application of PAR 2017/8, is that at the time the Arrangement is entered into, the parties do not clearly understand as a matter of fact the total amount Entity B is contractually obliged to pay over the term of the Arrangement.

As stated in paragraph 169 of GSTR 2000/29:

It is not accepted that you do not know the consideration for a supply simply because there is a possibility that the amount of the consideration for the supply may change.

We acknowledge that the precise consideration payable pursuant to Contract 2 will not be known until the completion of the Facilities however we consider it reasonable that both Entity A and Entity B regarded the consideration payable pursuant to Contract 2 to be $x. Therefore, as discussed above, we do not consider attribution under PAR 2017/8 to be appropriate in this case.

The GST payable by Entity A in regard to its supply of entering into the obligation to enter/grant Lease B is attributable under the basic rules in subsection 29-5(1). Given the facts of this case, this would be at the earlier of the following events:

•         Entity B commences the Project Works

•         Payment of the Development Sum (in part or in full)

•         Entity A submitting an invoice to Entity B in regard to Ancillary Works Costs.

1 King v. Earl Cadogan (1915) 3 K.B. 485.

2 King v. Earl Cadogan (1915) 3 K.B. 485.

3 King v. Earl Cadogan (1915) 3 K.B. 485.

4 Property Holding Co Ltd v. Clark (1948) 1 All ER 165.