Edited version of private advice

Authorisation Number: 1052189563168

Date of advice: 23 November 2023

Ruling

Subject: GST - appropriations relating to the purchase of real property

Question 1

Does subsection 9-17(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to the payment made by Department B for the purchase of <number> properties specified in the contract of sale with the Department A, so that this payment does not constitute the provision of consideration within the meaning of section 9-15 of the GST Act?

Answer

With respect to the purchase of Property RR - yes.

With respect to the purchase of the remaining properties - yes, but only if the payment for the remaining properties does not exceed the actual or anticipated costs of Department A supplying them to Department B.

Question 2

If the answer to Question 1 is yes, is the supply of Property RR to Department B not a taxable supply under section 9-5 of the GST Act because of the effect of subsection 9-17(3)?

Answer

Yes. The effect of subsection 9-17(3) means that the sale of Property RR is not a supply made for consideration under paragraph 9-5(a), and the sale is not taxable under section 9-5.

Question 3

If the answer to Question 1 is yes, are the supplies of the other properties to Department B not input taxed supplies of residential premises under section 40-65 of the GST Act because of the effect of subsection 9-17(3)?

Answer

No - the supplies of the other properties remain input taxed under section 40-65. Subsection 9-17(3) has no interaction with section 40-65.

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 purchased <property address> (Property RR) and <number> of residential properties (the Residential Properties) from their respective owners. The amount Department A paid for Property RR was $x (the RR Acquisition Cost). The amount Department A paid for the Residential Properties is unknown.

Appropriation to Department B to finance the purchase of Property RR and the Residential Properties 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 Property RR and the Residential Properties for specific policy purposes. The authority to make such an additional appropriation is provided for in legislation.

Sale of Property RR and the Residential Properties to Department B

On <date>, Department A entered into a contract to sell Property RR and the Residential Properties to Department B (the Sale Contract) for $x (the Total Purchase Price), of which $y was attributed to the purchase of Property RR (the RR Purchase Price). The Total Purchase Price represents the market value as assessed by the government's Valuer-General. Settlement took place on <date>.

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 9-30

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

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

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

In this reasoning, please note:

•         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's website ato.gov.au

Question 1

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 Property RR and the Residential Properties 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 Property RR and the Residential Properties from Department A will not be consideration for their supply 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 Property RR and the Residential Properties (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 Property RR and the Residential Properties does not exceed Department A's anticipated or actual costs of supplying them 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 Property RR and the Residential Properties 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 Property RR and the Residential Properties 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, Property RR and the Residential Properties.

The facts show that Department A acquired Property RR on <date> for $x. Department B then later purchased Property RR from Department A for $y on <date>, which represented the market value of the property at that time according to the valuation provided by the government's 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 Property RR than the amount they received for selling it to Department B. Given the payment made by Department B for the sale of the Property RR does not exceed Department A's actual costs in selling it to Department B, this element of subsection 9-17(3) is satisfied with respect to Property RR.

The facts show that Department B purchased the Residential Properties from Department A on <date> for $x, being the balance of the sale price. No facts are provided by Department B on how much Department A paid to acquire the Residential Properties from the previous owners. Consequently, the Commissioner is unable to conclusively rule on whether the amount Department B paid for the Residential Properties satisfies the non-commercial test under paragraph 9-17(3)(c). In the event that the amount paid by Department B for the Residential Properties does not exceed Department A's actual or anticipated costs in selling them to Department B, this element of subsection 9-17(3) will also be satisfied with respect to the Residential Properties.

Conclusion

With respect to Property RR, Department B's payment to Department A for the property meets all of the requirements of subsection 9-17(3). This payment is therefore not the provision of consideration for the supply of Property RR pursuant to subsection 9-17(3) and section 9-15.

With respect to the Residential Properties, Department B's payment for the property will meet all of the requirement of subsection 9-17(3) if the payment does not exceed the actual or anticipated costs of Department A supplying them to Department B. The payment therefore will not be the provision of consideration for the supply of the Residential Properties pursuant to subsection 9-17(3) and section 9-15 in those circumstances.

Conclusion

Department B's payment of the Purchase Price to Department A for Property RR 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).

With respect to the Residential Properties, Department B's payment for the property will meet all of the requirement of subsection 9-17(3) if the payment does not exceed the actual or anticipated costs of Department A supplying them to Department B. The payment therefore will not be the provision of consideration for the supply of the Residential Properties pursuant to subsection 9-17(3) and section 9-15 in those circumstances.

Question 2

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.

On these facts, the first element of section 9-5, that there must be a supply for consideration, is not met. The payment for Property RR is not the provision of consideration within the meaning of subsection 9-17(3) and section 9-15 for the reasons outlined in the answer to Question 1. There is therefore no supply made for consideration under paragraph 9-5(a) for the sale of Property RR to Department B. The sale to Department B of Property RR is not a taxable supply under section 9-5.>

Question 3

Subsection 9-30(2) provides that a supply is input taxed if, among other things, it is input taxed under Division 40. Relevantly on these facts, subsection 40-65(1) provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be predominantly for residential accommodation (regardless of the term of occupation).

The Residential Properties contain residential premises to be used predominantly for residential accommodation. The sale of the Residential Properties to Department B, therefore, would be ordinarily input taxed under subsection 40-65(1). The question is whether subsection 9-17(3) has any effect on subsection 40-65(1) to cause the sales of the Residential Properties to no longer be input taxed.

Subsection 40-65(1) says nothing about the provision of consideration, which is what subsection 9-17(3) deals with. The provision of consideration has no bearing on whether the sale of residential premises to be used predominantly for residential accommodation is input taxed. All that is required for subsection 40-65(1) to be engaged is for there to be a) a sale; and b) the sale is of a residential premise to be used predominantly for residential accommodation. Both elements of subsection 40-65(1) are made out on these facts with respect to the Residential Properties, and so subsection 40-65(1) is engaged. Subsection 9-17(3) has no role to play.

The sale of the Residential Properties is therefore an input taxed supply of residential premises under subsection 40-65(1).