Edited version of private advice

Authorisation Number: 1052238092143

Date of advice: 22 May 2024

Ruling

Subject: GST - supplies of social and affordable housing

Question 1

Will the lease of accommodation in 'non-market dwellings' be GST-free pursuant to subparagraph 38-250(1)(b)(i) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where the consideration received for the lease is less than 75% of the GST inclusive market value?

Answer

Yes.

Question 2

Does the subsidy payment payable under the Deed need to be taken into account for the purposes of determining the application of subparagraph 38-250(1)(b)(i) of the GST Act?

Answer

No.

Question 3

Is the Instalment payable under the Deed by the State consideration for a taxable supply pursuant to section 9-5 of the GST Act?

Answer

No.

Question 4

Does the Instalment payable under the Deed need to be taken into account for the purposes of determining the application of subparagraph 38-250(1)(b)(i) of the GST Act?

Answer

No.

Question 5

Is the donation consideration for any supply?

Answer

No.

The scheme commences on:

The date of issue of this notice of private ruling

Relevant facts and circumstances

The State has entered into agreements via a number of funding and related deeds to increase the supply of social and affordable housing.

Entity A provides quality social and affordable housing properties.

Entity A is registered as a charity under the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (ACNC Act).

Entity A has committed to provide dwellings across a number of sites (each, a Site or Property, or collectively the Sites or Properties) in connection with the Project. Entity A has established Entity B to facilitate the delivery of the Project.

Entity A is registered for GST.

Entity B was incorporated as an Australian public company limited by guarantee (Unlisted public company). Entity A is the sole member of Entity B.

Entity B is registered under the ACNC Act as:

•         a charity; and

•         advancing social or public welfare (as its charity sub-type)

as defined in section 12(1) of the Charities Act 2013 (Cth) (Charities Act) and in accordance with section 25-5(1)(b) of the ACNC Act.

As part of the application to ACNC to be registered as a charity, Entity A provided a Business Plan under which it was broadly declared that the primary purpose of the Project to be undertaken is to increase the supply of social and affordable housing.

Entity B is endorsed by the ATO to access the following tax concessions:

•         Income tax exemption under Subdivision 50-B of the Income Tax Assessment Act 1997 (Cth).

•         GST concessions under Division 176 of the GST Act.

•         FBT rebate under section 123E of the Fringe Benefits Tax Assessment Act 1986 (Cth).

•         Entity B is registered as a charitable institution under section 149C(2) of the Taxation Administration Act 2001 (Qld).

•         Entity B is registered as a Tier 1 Community Housing Provider (CHP) under the National Regulatory System for Community Housing.

•         Entity B is registered for GST. Entity A and Entity B are not members of the same GST group and do not intend to form a GST group.

Project overview

Initially, Entity A executed capital grant funding agreements with the State and loan agreements to finance the development of Sites. Entity A will also receive grant funding from Housing Australia. Entity A is taking the development and construction risks on these Sites.

Under the arrangements, Entity A agrees to develop/construct/deliver the relevant Sites for which it receives the grant funding. The funding is treated as being consideration for a taxable supply and GST has been accounted for.

Entity B will enter an Option Deed to acquire each Site from Entity A soon after practical completion of each Site, subject to certain conditions, and lease the relevant dwellings within each Site to eligible tenants.

Of the dwellings, XX% (by number of dwellings) will be social or affordable housing (for the purpose of this private ruling application, these homes/properties are referred to as 'non-market dwellings'). The remaining XX% will be market rental housing (for the purpose of this private ruling application, these homes/properties are referred to as 'market dwellings') to support the provision of social and affordable housing, or mixed-use complexes (e.g. properties with a mix of non-market and market dwellings) where these form part of the planning requirements of the local authority. The mix for the initial seven Sites is reflected in table below.

The rent payable under the leases for non-market dwellings will be priced at less than 75% of the GST-inclusive market value of the lease supplied as per the Deed and Entity A's Social Rent Policy and Entity A 's Affordable Housing Rent Policy.

The social/affordable and market dwelling mix for subsequent Sites may be different, but in any event the rent payable under a lease for a non-market dwelling will be priced at less than 75% of the GST-inclusive market value.

Entity B will acquire the Sites from Entity A for the Purchase Price (discussed below under Option Deed). Entity B will finance the acquisition through drawdowns on the:

•         Senior Debt;

•         Subordinated Debt;

•         Cost overrun facility provided by Entity A (if applicable); and

•         the balance of the acquisition price which will be funded by way of a donation by Entity A (Donation), being an amount equal to the aggregate amount of State and grant funding provided to Entity A in connection with the development of the Sites.

The senior financing to be provided is currently the subject of a draft term sheet and will provide the following:

•         "Senior Bridge Facility"

•         "Senior Concessional Facility"

•         "Senior Take Out Facilities" to refinance the Senior Bridge Facility

The subordinated financing to be provided is currently the subject of a draft term sheet. The State will provide an amortising term loan to fund (in conjunction with the Senior Bridge Facility and, if applicable, the Senior Concessional Facility, the Cost Overrun Facility and the Donation) the acquisition costs of each Site and certain agreed transaction costs. Each tranche of funding under the Subordinated Debt Facility will be provided for a term of XX years commencing on the date of acquisition of the relevant Site and will be amortised via quarterly equal instalments over the term of the tranche.

As at the date of this private ruling application, Contractual Close is targeted and Financial Close is intended to be achieved on individual Sites progressively.

Deed 1

The State has agreed to provide certain funding to assist Entity B to operate and maintain the Project, in accordance with the terms of the Project Documents. The form of the funding from the State to Entity B includes the Payment (see below under Deed 2) and the Instalment.

The Instalment is a payment made by the State to Entity B to fund the first XX months of interest payable by Entity B to the Subordinated Lender in respect of the funding for each Site. The financial model will include details/calculations of the interest payable by Entity B to the Subordinated Lender which the Instalment payment payable by the State is matched/calculated by reference to. The financial model funding calculations are independent of any vacancy considerations.

This payment is made for the period commencing on the date of Financial Close for the relevant Site and expiring XX months after the date of Financial Close for the relevant Site. Financial Close for a Site is conditional upon Site Ownership for that Site occurring on the date of Financial Close for that Site.

The Instalment is paid by way of an upfront payment from the State to the Entity B on the Payment Date (being the later of the date falling XX Business Days after (i) the date of Financial Close in respect of the relevant Site; and (ii) the date the Entity B delivers an invoice for the Instalment for that Site to the State).

Deed 2

Under the Deed, Entity B is contracted to provide the following services in relation to the dwellings on the properties acquired by Entity B in exchange for the payment (i.e. the Payment) by the State:

Table 1: Under the Deed, Entity B is contracted to provide the following services in relation to the dwellings on the properties acquired by Entity B in exchange for the payment by the State:

The State will pay the Payment, as referred to in this application to Entity B on each Payment Date as consideration for Entity B performing the 'Provider's Obligations' under the Deed. All the services that must be provided under the Deed have been contracted out via Entity A Administration Services Agreement, the Entity A Tenancy and Asset Management Agreement and the Administration Services Agreement.

The Payment is the aggregate of the amount for each Site.

The Payment for a Site is determined on the date of Financial Close for that Site by updating the Financial Model in accordance with the Financial Close Adjustment Protocols (FCAP). The FCAP updates include, for example, the input of the final property acquisition price, the input of interest rates payable under the relevant tranche of funding and the input of operating costs escalation rates per CPI and WPI (as applicable). The Financial Model may also be separately adjusted prior to Financial Close for any State Contributing Events arising prior to Financial Close of the relevant Site and any other amendments agreed by the parties (including any agreed adjustments to External Advisory Costs to be paid by the State or changes to escalation assumptions).

The Payment may also be adjusted during the term of the Subsidy Deed for any State Contributing Event Amounts, Vacancy Abatement Amounts or Interest Rate Adjustment Amounts.

The Subsidy Payment is also subject to an annual fixed rate increase on 1 July each year.

Deed 3

Entity A, as Vendor of the Sites (which are defined in the draft Deed to be the 'Project Lots'), has agreed to grant Entity B, as Purchaser, an option to buy each of the Project Lots on the terms set out in the Deed and the Contract in respect of the relevant Project Lot.

Entity B, as Purchaser, has agreed that subject to the provisions of the Deed, the Vendor may require the Purchaser to buy each of the Project Lots (on the terms set out in the Deed and the Contract in respect of the relevant Project Lot) if the Purchaser does not exercise the Call Option.

The Donation is a donation from Entity A to Entity B in respect of each Project Lot to fund the balance of the Purchase Price, which is equal to the amount of grant funding provided to Entity A in connection with funding the construction and development of the Sites. The Deed currently provides the following in respect to the Donation:

(a) In respect of each Project Lot, the Vendor will be deemed to pay the Donation for that Project Lot to the Purchaser at [Completion/Settlement] under the Contract in respect of that Project Lot.

(b) The parties agree that the payment of the Donation by the Vendor to the Purchaser in respect of a Project Lot will be set off against the Purchase Price to be paid by the Purchaser to the Vendor in relation to that Project Lot.

A number of documents were provided by the applicant in support of their private ruling application and form part of the scheme to be ruled upon

Relevant legislative provisions

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

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

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

Reasons for decision

Question 1

Section 38-250 of the GST Act deals with the provision of accommodation by charities.

Being an endorsed charity and deductible gift recipient, Entity B's supply of accommodation in social & affordable housing to eligible tenants under the relevant agreements will be GST-free under section 38-250 of the GST Act, if the supply is made for 'consideration' that is less than 75% of the GST inclusive market value of the supply.

Consideration within the meaning of section 9-15 of the GST Act 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 rent paid under the residential tenancy agreements to be entered into between Entity B and the tenants will be payment in connection with the supply of accommodation in the social & affordable housing. Consequently, this rent will be consideration for the supply of accommodation within the meaning of section 9-15 of the GST Act and for the purposes of section 38-250 of the GST Act.

The rent payable under the leases for non-market dwellings will be priced at less than 75% of the GST inclusive market value of the lease supplied as per the requirements set out in the Deed and Entity A's Social Rent Policy and Entity A's Affordable Housing Rent Policy.

As per the answers to question 2 & 4, the other payments and funding received by Entity B are not included in the consideration received for the supply of social & affordable housing. Therefore, the supplies of leased accommodation will be GST-free pursuant to subparagraph 38-250(1)(b)(i) of the GST Act.

Question 2

The payment payable under the Deed for each annual period is consideration for Entity B performing their obligations.

These obligations are detailed in the Deed.

For a payment to be consideration for a supply there must be a sufficient nexus between the payment made by the payer and a supply made by the payee. A 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.

The payments under the Deed are specifically made in relation to the supplies Entity B make to the State which will be taxable supplies. There is a direct relationship between the payments and the obligations performed.

As such, the payments do not need to be taken into account for the purposes of determining the application of subparagraph 38-250(1)(b)(i) of the GST Act because they are separate to the consideration received by tenants for the supply of social & affordable housing.

Question 3

Under section 9-5 of the GST Act, an entity makes a taxable supply where:

•         it makes a supply for consideration;

•         it makes the supply in the course or furtherance of an enterprise it carries on;

•         the supply is connected with the Australia;

•         the entity is registered, or required to be registered, for GST; and

•         the supply is not GST-free, or input taxed.

In assessing whether a 'supply' is made by Entity B, it is necessary to analyse the terms and nature of the agreement entered into (i.e. the Deed).

Given the definition of 'supply' for GST purposes is very broad, the entry into the Deed and the subsequent performance of the obligations (namely the activities to progress Sites to Financial Close) gives rise to supplies being made by Entity B. As Entity B is making supplies in connection with the Deed, we need to consider if the payment of the Instalment has a sufficient nexus to any of those supplies.

The Instalment is a payment made by the State to Entity B to fund the first XX months of interest payable by Entity B to the Subordinated Lender in respect of the funding for each Site. This payment is made for the period commencing on the date of Financial Close for the relevant Site and expiring XX months after the date of Financial Close for the relevant Site.

As established in question 2, the supplies made by Entity B under the Deed are taxable supplies for which the payments are consideration. The Side Deeds (both Initial and Additional) are between the State and Entity A and, therefore, do not involve Entity B.

The obligations Entity B have entered into under the Deed appear to be more closely related to either eligibility criteria or conditions precedent that need to be met prior to receiving the Instalment. In other words, the Instalment is not the payment of consideration for supplies made by Entity B under the Deed.

Question 4

The SDIP Instalment is a payment made by the State to to fund the first XX months of interest payable by Entity B to the Subordinated Lender in respect of the funding for each Site.

The Instalment is based upon the calculations in the Financial Model. The Financial Model includes details/calculations of the interest payable by Entity B to the Subordinated Lender which the Instalment payment payable by the State is matched/calculated by reference to. The Financial Model funding needs to consider the cash flows required to repay the funding capital used in the acquisition price. This includes a factor based upon expected vacancies but is factored on the basis of rent that is less than 75% of market value.

Therefore, there is an insufficient nexus between the Instalment and the supply made by Entity B of social & affordable housing. As such, the Entity B Instalment does not form part of the consideration received from tenants for the supply of social & affordable housing for the purposes of determining the application of subparagraph 38-250(1)(b)(i) of the GST Act.

Question 5

The Purchase Price to acquire the Project Lots under the Deed is calculated to include the total amount of any Donation for that Project Lot.

The Donation is a payment from Entity A to Entity B in respect of each Project Lot to fund the balance of the Purchase Price, which is equal to the amount of grant funding provided to Entity A in connection with funding the construction and development of the Sites.

As per Proposition 5 of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9), an entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient). This is consistent with the ordinary meaning of 'supply', being to furnish or provide.

72. The High Court said in Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49 (MBI Properties) that it is not necessary that the making of a supply must always involve the taking of some action on the part of the supplier. In this regard, the reasoning adopted in some earlier court and tribunal decisions that considered when an entity makes a supply needs to be qualified to reflect this observation. The High Court recognised that an entity can provide something, and therefore make a supply, by means of refraining from acting or by means of tolerating some act or situation, just as it can by means of doing some act.

73. The High Court noted that a transaction which involves a supplier entering into and performing an executory contract will in general involve the supplier making at least two supplies. The first being creation of contractual rights and obligations at the time of entry into the contract and secondly, a supply by means of contractual performance of the obligation. The High Court recognised that providing continuing use and enjoyment of premises by observing an express or implied covenant of quiet enjoyment under a lease, the supplier was providing something, albeit by means of refraining from doing something or tolerating some act or situation.

Although the Donation is made as part of the Option Agreement, there are obligations arising under the agreement that bind both Entity A as vendor and Entity B as purchaser.

Whilst the entry into an agreement itself can be a supply, Entity B does not enter into the Option Deed for the Donation. Rather, Entity B enters into the agreement in order to acquire an option to purchase the Sites for which it will pay the applicable purchase price.

Accordingly, there is no relevant nexus between the Donation and Entity B's supply of entering into the Deed. Entity B does not otherwise make any supply for which it receives the Donation under the Project. As such, the Donation forms part of the calculation of the consideration to be provided for the supply of an underlying dwelling by Entity A. It is not consideration for any separate supply made by Entity B.