Edited version of private advice

Authorisation Number: 1052188564076

Date of advice: 3 November 2023

Ruling

Subject: GST and appropriations relating to the sale of real property

Question

Is the sale of <property description> a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

Department A and Department B are government related entities for the purposes of the GST Act. Both Department A and Department B are registered for GST.

On <date> Department A entered into a contract to purchase <property description> (the Property) from the previous owner for $x (the Acquisition Cost). The Property at that time contained a residential dwelling. Settlement for the purchase took place on <date>.

Use of the Property during Department A ownership

On or around <date>, the existing dwelling on the Property was demolished and the Property was used by Department A as a laydown and storage area up until <date>. Following this date, the Property has remained as vacant land.

Appropriation to Department B to finance the purchase of the Property from Department A

The amount of $x was released to Department B as an additional appropriation from the relevant government's consolidated revenue fund for the specific purpose of acquiring the Property for specific policy purposes. The authority to make such an additional appropriation is provided for in legislation.

Sale of the Property to Department B

On <date>, Department A entered into a contract to sell the Property to Department B (the Sale Contract) for $x (the Purchase Price). The Purchase Price represents the market value as assessed by the government's Valuer-General. Settlement took place on <date> and on the day of settlement the Property remained as vacant land.

Relevant legislative provisions

A New Tax System (Australian Business Number) Act 1999 section 41

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

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

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

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

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

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Section 9-5 provides that you make a taxable supply if:

a)    you make the supply for consideration

b)    the supply is made in the course or furtherance of an enterprise that you carry on

c)    the supply is connected with the indirect tax zone (Australia)

d)    You are registered or required to be registered.

However the supply is not a taxable supply to the extent that it is GST-free or input taxed.

It will be considered first whether there is a supply for consideration under paragraph 9-5(a) in relation to Department A's sale of the Property to Department B.

Subsection 9-10(1) provides that a supply is any form of supply whatsoever. In particular, paragraph 9-10(2)(d) provides that a supply includes a grant, assignment or surrender of real property. Department A's sale of the Property to Department B constitutes a supply within the meaning of paragraph 9-10(2)(d).

Subsection 9-15(1) provides that consideration includes:

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

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

Ordinarily, the payment made to purchase a property is the consideration provided for the supply of that property. The payment made by Department B to purchase the Property is made pursuant to an additional appropriation authorised by legislation. The interaction between payments made pursuant to an appropriation and the provision of consideration is dealt with in subsection 9-17(3).

Subsection 9-17(3) provides that a payment is not the provision of consideration in the following circumstances:

a)    the payment is made by a government related entity to another government related entity for making a supply

b)    the payment is:

i)      covered by an appropriation made under an Australian law; or

ii)     made under the National Health Reform Agreement agreed to by the Council of Australian Governments on 2 August 2011, as amended from time to time; or

iii)   made under another agreement entered into to implement the National Health Reform Agreement

c)    the payment is calculated on the basis that the sum of:

i)      the payment (including the amounts of any other such payments) relating to the supply

ii)     anything (including any payment for any act or forbearance) that the other government related entity receives from another entity in connection with, or in response to, or for the inducement of, the supply, or for any other related supply

does not exceed the supplier's anticipated or actual costs of making those supplies [the 'non-commercial test'].

Application of subsection 9-17(3) to Department A's sale of the Property to Department B

Adapting the test under subsection 9-17(3) to these facts, the amount Department B paid to purchase the Property from Department A will not be consideration for the supply of the Property if:

• Department B and Department A are both government related entities (paragraph 9-17(3)(a))
• Department B has made a payment to Department A for the purchase of the Property (paragraph 9-17(3)(a))
• the payment is covered by an appropriation made under an Australian law (subparagraph 9-17(3)(b)(i))
• the payment Department B made for the Property does not exceed Department A's anticipated or actual costs of supplying the Property to Department B (paragraph 9-17(3)(c)) (the 'non-commercial test').

Government related entities

'Government related entity' is defined in section 195-1 as, among other things, a 'government entity', which has the meaning given by section 41 of the A New Tax System (Australian Business Number) Act 1999 (the ABN Act). Section 41 of the ABN Act provides that a 'government entity' means, among other things, a Department of a State or Territory. It is clear on the facts that both Department A and Department B are Departments of a State or Territory. Therefore this element of subsection 9-17(3) is satisfied.

Payment for making a supply

Department B has made a payment for the purchase of the Property to Department A. Therefore, this element of subsection 9-17(3) is also satisfied.

Appropriation made under an Australian law

'Appropriation' is not defined in the GST Act or in other Commonwealth tax-related legislation. The Macquarie Dictionary defines 'appropriation' as:

1. anything appropriated for a special purpose, as money; 2. the act of appropriating; 3. an act of a legislature authorising money to be paid from the treasury.

'Australian law' is defined in section 195-1 of the GST Act and takes the same meaning from section 995-1 of the Income Tax Assessment Act 1997, which provides that an Australian law is a law of the Commonwealth, a State or a Territory.

On this basis, we consider that an 'appropriation under an Australian law' means an allocation of monies by a statute of the Commonwealth, a State or a Territory, or by delegated legislation.

On these facts, the payment by Department B for the purchase of the Property was financed by an additional appropriation made under an Australian law allocating monies from the relevant government's consolidated revenue fund. This element of subsection 9-17(3) is therefore satisfied.

Non-commercial test

Paragraphs 2.23, 2.27 and 2.31 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Bill 2012, which inserted subsection 9-17(3) into the GST Act, discuss the non-commercial test in paragraph 9-17(3)(c) as follows:

2.23 These amendments ensure that the non-commercial activities of government are not subject to GST. This is achieved by requiring that the payment for the supply be calculated on the basis that the sum of the payment and anything else the government related entity supplier receives from another entity in connection with, or in response to, or for the inducement of, the supply or any other related supply, does not exceed the government related entity supplier's anticipated or actual cost of making the supplies.

...

2.27 Whether or not the amount of the payment exceeds the government related entity supplier's anticipated or actual costs of making the supply, or supplies, is determined at the time at which the amount to be paid is worked out rather than at the time of payment (if it is later). If the determination of the amount of the payment to be made takes place before the relevant supply, or supplies, are made, it will be necessary to base the calculation on the anticipated costs of making the supply, or supplies. ...

...

2.31 In the context of these amendments, the concept of cost includes the government related entity supplier's direct and indirect costs of making the supply or supplies, but does not include a return on capital or concepts of cost which are measured based on opportunity cost or forgone revenue. An absorption costing methodology is an example of a methodology that may be used to calculate the anticipated or actual costs of making the supply or supplies.

The Commissioner considers that the 'cost of making the supply' must necessarily include the cost of acquiring the thing that is being supplied - in this case, the Property. The facts show that Department A acquired the Property for the Acquisition Cost. Department B then later purchased the Property from Department A for the Purchase Price, which was lower than the Acquisition Cost, and represented the market value of the Property at that time according to the valuation provided by the Valuer-General. While the market value of real property fluctuates from time to time, it is clear from the facts that Department A incurred greater costs in acquiring the Property than the amount they received for selling it to Department B.

Given the payment made by Department B for the sale of the Property does not exceed Department A's actual costs in selling the Property to Department B, this element of subsection 9-17(3) is satisfied.

Conclusion

Department B's payment of the Purchase Price to Department A for the Property meets all of the requirements of subsection 9-17(3). The payment is therefore not the provision of consideration for the supply of the Property pursuant to subsection 9-17(3).

Because Department B's payment for the supply of the Property is not the provision of consideration, there is no supply made for consideration under paragraph 9-5(a), and so Department A's sale of the Property to Department B is not a taxable supply within the meaning of section 9-5.