Private ruling: NRAS Consortium - GST & Consideration paid for the Head Lease
Published: November 2013

Ruling: Q1: Where the Head Lease is in relation to commercial residential premises as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), is the Fee paid by the trust to the not for profit entity (NFP) wholly consideration for a taxable supply of commercial residential premises pursuant to section 9-5 of the GST Act and therefore, subject to Goods and Services Tax (GST)? | A1: Yes, the Fees paid by the trust to the NFP is wholly consideration for a taxable supply pursuant to section 9-5 of the GST Act and is therefore, subject to GST. | Q2: Where the Head Lease is in relation to residential premises which are not commercial residential premises as defined in section 195-1 of the GST Act, is the Fee paid by the trust to the not for profit entity (NFP) wholly consideration for an input taxed supply of residential premises by way of lease pursuant to subsection 40-35(1) of the GST Act and therefore, not subject to GST? | A2: Yes, the Fees paid by the trust to the NFP is wholly consideration for an input taxed supply of residential premises by way of lease pursuant to subsection 40-35(1) of the GST Act and is therefore, not subject to GST.

Relevant facts and circumstances: · Investors will acquire units in an Australian unit trust · The Investors will be presently entitled to their share of the net income of the trust, which will entitle the investors to tax offsets pursuant to Division 380 of the ITAA 1997. The NRAS was established to encourage large-scale investment in affordable housing. The Scheme offers incentives where new dwellings are rented to low and moderate income households at a discount below market rates. There are two benefits available under the product: one provided by the Commonwealth Government and another provided by the State Government. The benefits are indexed annually to the rents component of the Housing Group of the Consumer Price Index. The benefit from the Commonwealth Government is in the form of a refundable tax offset: Division 380 and item 23 of section 67-23 of the ITAA 1997. The benefit from the State Government may be either a cash payment or an in kind payment, such as a reduction in rates. It is anticipated that the benefit from the State Government will be a cash payment made annually. The State Government benefit is Non Assessable Non Exempt (NANE) income: section 380-35 of the ITAA 1997. These benefits may be reduced if a dwelling does not meet the rental and vacancy requirements in regulation 28 of the NRAS Regulations 2008. Relevant transaction details The trust will enter into a consortium agreement with an entity (typically a NFP) which, for the purposes of this example will be the legal owner of the NRAS dwelling. The NFP is an approved participant under the NRAS. Under the terms of the agreement: · The NFP will lease the dwelling to the trust under a head lease (Head Lease). The consideration for the Head Lease is made up of monthly rental payments. · The trust will lease the dwellings back to the NFP under a sub-lease (Sub Lease 1). The consideration for Sub Lease 1 will be monthly rental payments payable by the NFP to the trust. · The NFP will lease the dwellings to the eligible NRAS tenants under a sub-lease (Sub Lease 2). The consideration for Sub Lease 2 will be monthly rental payments made by the NRAS tenants to the NFP. As additional consideration for the Head Lease the trust will pay an annual fee to the NFP (Fee). · The trust will issue units to Investors. · The Housing Secretary will issue an NRAS certificate (or certificates) to the NFP, setting out the amount of the tax offset in relation to each rental dwelling. The payment from the State Government (being the NANE income) is also expected to be and retained by the NFP. · The trustee will make a distribution to Investors of the net income of the trust. In any event, the Investors will, in aggregate, be presently entitled to the whole of the net income of the trust pursuant to the trust's constitution.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999: Section 7-1; | Section 9-5; | Section 9-10; | Section 9-15; | Section 40-35; | Section 195-1. | Income Tax Assessment Act 1997 Section 67-23; | Division 380.

Reasons for decision: Summary: Under section 9-5 of the GST Act you make a taxable supply if: (a) the supply is made 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 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. Subsection 9-15(1) of the GST Act defines consideration as including: (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. Under subsection 40-35(1) of the GST Act a supply of premises by way of lease, hire or licence is input taxed if the supply is of "residential premises". This section specifically excludes (among other things) "commercial residential premises" from being input taxed. The meaning of the terms "residential premises" and "commercial residential premises" is set out in section 195-1 of the GST Act and is a question of fact. As the premises to be leased have not been nominated, this ruling cannot address whether the premises leased under the Scheme will be "residential premises" or "commercial residential premises". The following discussion proceeds on the basis that the requirements of section 195-1 of the GST Act are met in each case and that a supply of "residential premises" will be by way of lease and satisfy the requirements of subsection 40-35(1) of the GST Act. In order to answer the questions considered in this ruling it is relevant to determine whether the payment of the annual consortium fee by the trust is wholly consideration for the for the NFP's supply of the ("residential" or "commercial residential") premises under the Head Lease. | Detailed Reasoning - Consideration for the Head Lease: The relevant clauses of the Consortium Agreement provide that the consideration for the Head Lease is comprised of rent and the annual Fee: The rent payable by the trust to the NFP in respect of the premises under the Head Lease is based on market value rent. As the trust will receive the NRAS tax offsets it is willing to pay consideration for the Head Lease in addition to the rent payable. The Fee represents the 'value' of the Head Lease to the trust in excess of the amount of rent payable for the supply of the premises under the Head Lease. Consideration is defined in section 9-15 of the GST Act and includes ' any payment … in connection with a supply… '. The price agreed between the parties as consideration for the Head Lease under the terms of the consortium agreement will be consideration for the purposes of the GST Act. Support for this proposition comes from the Tribunal Member's statement in Luxottica Retail Australia Pty Ltd v Commissioner of Taxation [2010] AATA 22 that, for GST purposes the quantum or adequacy of consideration is a contractual matter to be decided between the relevant parties. To the extent that the premises supplied under the Head Lease qualify as "commercial residential premises" the Fee is wholly consideration for a taxable supply of "commercial residential premises" and would therefore be subject to GST. To the extent that the premises supplied under the Head Lease qualify as "residential premises" which are not "commercial residential premises" the Fee is wholly consideration for an input taxed supply of residential premises by way of lease and would therefore not be subject to GST.