Private ruling: GST and supply of new residential premises
Published: February 2015

Ruling: Q1: For the purpose of applying section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is the value of the deposit plus the net present value of Loan A and Loan B to be treated as the "consideration" for the transfer of new residential premises by you to the relevant entities pursuant to the your model transaction? | A1: No - For property transactions, the supply (for GST purposes) occurs at the date of settlement. As the reduction to the selling price occurs prior to the time of sale, the consideration is the amount received at settlement. | Q2: If the answer to question 1 is yes, do you have a goods and services tax (GST) liability for GST in relation to the sale of the residential premises sold to relevant entities? | A2: Yes | Q3: If the answer to Question 1 is no, and the answer to Question 2 is yes, do you have a GST liability for the sale of the residential premises relevant entities you have previously made? | A3: Please refer to reasons for decision.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. • You are a company and are endorsed as a deductible gift recipient pursuant to the Income Tax Assessment Act 1997 (Cth) (ITAA); • You are also endorsed to access the following tax concessions: • GST concession; and • income tax exemption. • You supply "new residential premises" (as defined for GST purposes) and refurbished residential premises to relevant entities. • The premises are supplied by you to relevant entities pursuant to the following transactions (which are referred to hereafter as the model transaction) Involving an Interest free loan arrangement in relation to the payment of the purchase price for the premises (Loan A) and a capital appreciation sharing arrangement (Loan B): • You acquire a suitable block of land or used residential premises for the purpose of constructing new residential premises. • You then supply the residential premises to a relevant entity who has been selected to receive a home on the basis of their low income and other eligibility criteria (relevant entity). • Each relevant entity contributes xxx hours of "sweat equity" to the construction of their residential premises or another residential premise that you are constructing. • The residential premises are constructed or renovated using a mixture of donated and purchased materials and labour. • Once the residential premises are completed, an independent valuation is obtained of the completed premises. You then discount the GST-inclusive market value of the premises by 5%. This discount represents the "sweat equity" that the relevant entity has in the completed premises. • The value of each residential premise is determined by an independent Valuer. • The relevant entity then "purchases" the residential premises from you for a stated contract purchase price equal to 95% of the GST-inclusive market value and pays a deposit of $yyy when the contract is entered into. • Completion of the sale of the premises takes place by title being transferred to the relevant entity and the relevant entity entering Into the Loan A and Loan B agreements, granting a mortgage over the premises and paying the first loan instalment under Loan A. • Often the relevant entity will move into the residential premises prior to settlement. Where this occurs rental agreements are sometimes entered into. You have advised that none of the relevant entities have occupied the residential premises for a period of five years or more prior to transfer. • You provide an interest free loan to the relevant entity for the stated contract purchase price ie 95% of the market value of the premises (ie 100% minus 5% "sweat equity"). This loan of the purchase price is referred to as Loan A. This has the effect that there is no "up front" cash payment for the property as there would be in a normal residential conveyance ie the only cash payments made on or prior to completion are the deposit of $yyy and the first instalment due under Loan A. • The second "loan" (Loan B) is in an arrangement pursuant to which in certain circumstances, you share in the capital appreciation of the premises in the event that the property is sold or transferred or the mortgage is otherwise discharged within 20 years of the purchase of the residential premises by the relevant entity. The amount that you are entitled to receive in these circumstances reduces over the term of Loan B. • As security for Loan A and Loan B, you take a mortgage over the residential premises. • The principal amount of Loan A is repaid at regular intervals. The repayments must not exceed 25% of the relevant entity's current gross annual income and may be increased by up to 3%, as long as they remain less than 25% of the relevant entity's current gross annual income. • No payment is required to be made under Loan B unless the relevant entity chooses to sell the residential premises or discharge the mortgage to you within 20 years of acquiring the premises. You advise that at the date of this application no payments have been made or been required to be made under Loan B. • In a relevant period you supplied a certain number of residential premises to relevant entities. • You have not remitted GST in relation to any of the new residential premises that you have supplied to relevant entities. • You have provided the information to support your arguments regarding the methodology you have used in your GST calculations both GST-free under section 38-250 of the GST Act or taxable.

Relevant legislative provisions: All references are to the A New Tax System (Goods and Services Tax) Act 1999 : Section 9-5 | Section 11-5 | Section 11-15 | Section 38-250

Reasons for decision: Summary: The value of a taxable supply is the amount without any discount for the amount of GST payable on the supply. For property transactions, the supply (for GST purposes) occurs at the date of settlement. As the reduction to the selling price occurs prior to the time of sale, the consideration provided by the purchaser is the discounted amount. | Detailed Reasoning - Detailed reasoning: Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) a taxable supply is made if: (a) the supply is made for consideration; and (b) the supply is made in the course or furtherance of an enterprise carried on by the supplier; and (c) the supply is connected with Australia; and (d) the supplier is 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. Under section 9-40 GST must be paid on any taxable supply that an entity makes. Section 9-70 states that the amount of GST on a taxable supply is 10% of the value of the taxable supply. The value of the taxable supply is calculated under section 9-75. Section 9-75 states (1) The value of a *taxable supply is as follows: Price x 10/11 where: price is the sum of: (a) so far as the *consideration for the supply is consideration expressed as an amount of *money- the amount (without any discount for the amount of GST (if any) payable on the supply); and (b) so far as the consideration is not consideration expressed as an amount of money- the *GST inclusive market value of that consideration. Section 9-10 of the GST Act provides that a supply is any form of supply whatsoever and includes amongst other things supplies of goods and services. There is no question that the supply of the residential premises is a supply made by you for the purpose of section 9-10 of the GST Act, Paragraph 37 of GSTR 2009/4 provides that the sale of new residential premises is a taxable supply. The sale is not input taxed to the extent that the residential premises are new residential premises other than those used for residential accommodation before 2 December 1998. New residential premises have the meaning given by section 40-75 of the GST Act (see section 195-1 Definitions). Supplies of residential premises will be input taxed under Subdivisions 40-B or 40-C of the GST Act unless the premises satisfy the criteria for new residential premises. In your case you advise that you supply "new residential premises" (as defined for GST purposes) and refurbished residential premises to relevant entities for a stated contract purchase price equal to 95% of the GST-inclusive market value of the premises. As part of the model transaction you acquire a suitable block of land or used residential premises for the purpose of constructing new residential premises. You then supply the new residential premises to a family who has been selected to receive a home on the basis of their ncome and other eligibility criteria (relevant entity). Each relevant entity contributes xxx hours of "sweat equity" to the construction of the new residential premises or another residential premise that you are constructing. These premises are constructed or renovated using a mixture of donated and purchased materials and labour. Once the new residential premises are completed, an independent valuation is obtained of the completed premises. You then discount the GST-inclusive market value of the premises by 5%. This discount represents the "sweat equity" that the relevant entity has in the completed premises. The relevant entity then "purchases" the new residential premises from you for a stated contract purchase price equal to 95% of the GST-inclusive market value and pays a deposit of $yyy when the contract is entered into. Completion of the sale of the premises takes place by title being transferred to the relevant entity and the relevant entity entering into the Loan A and Loan B agreements, granting a mortgage over the premises and paying the first loan instalment under Loan A. The model transaction is not dissimilar to the process normally undertaken when supplying land and housing under a standard land contract, which normally involves the following: • the parties enter into a standard land contract either by the exchange of contracts or by both parties signing one contract; • a deposit is paid to the vendor by the purchaser at the time of entering into the contract; • the deposit is held by a vendor until it is applied to the vendor's benefit at settlement; • the vendor will execute a transfer in favour of the purchaser; • at settlement the transfer in the purchaser's favour and certificate of title are exchanged for the purchase price; • the purchaser (or purchaser's mortgagee) registers the transfer upon the certificate of title; and • the purchaser pays to the vendor the balance of the purchase price by, for example, obtaining a loan from a third party. What now needs to be considered is what the actual consideration for the new residential premises is. | Detailed Reasoning - Consideration: Consideration is defined in subsection 9-15(1) of the GST Act to include any payment or any act or forbearance for a supply if the payment, act or forbearance is in connection with, in response to, or for the inducement of a supply. The payments you receive in relation to the supply of the new residential premises are consideration for the purposes of section 9-15 of the GST Act. Goods and Services Tax Determination GSTD 2006/3 Goods and services tax: are settlement adjustments taken into account to determine the consideration for the supply or acquisition of real property? provides the Tax Office view on consideration at settlement. Paragraph 2 of the Determination states: The consideration may be either monetary or non-monetary or both. The consideration will not always be the price shown on the contract as, on settlement adjustments are commonly made for rates, land tax and other outgoings. Goods and Services Tax Ruling GSTR 2000/28 provides the Australian Taxation Office (Tax Office) view on how to attribute GST on sales of land under standard land contracts. The term 'standard land contract' is defined in paragraph 13 of GSTR 2000/28. It states 13. For purposes of this Ruling, a standard land contract is a written contract for the sale of land that provides for: the payment of a deposit that is either to be forfeited if the purchaser defaults or applied as consideration on settlement; and the payment of the balance of the purchase price upon settlement. On the facts provided you will sell the new residential premises under written contracts for the sale of land that will provide for • the payment of a deposit that is either to be forfeited if the relevant entity defaults or applied as consideration on settlement; and • the payment of the balance of the purchase price upon settlement by the relevant entity by obtaining Loan A from you. | Detailed Reasoning - Sweat Equity - 5%: You have advised that in addition to the Loan A that you provide to the relevant entity (as consideration for the residential premises) that each relevant entity also contributes xxx hours of "sweat equity" to the construction of the new residential premises or another residential premise that you are constructing and that you allow a 5% discount on the Loan A in recognition of this. What then needs to be considered is whether the 'sweat equity' forms part of the consideration for the residential premises. There must be sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. (Refer to paragraph 50 of Goods and Services Tax Ruling GSTR 2001/6 GST: non-monetary consideration ) Further, at paragraph 70 of GSTR 2001/6 it provides that consideration will be "in connection with" property where "the receipt of the payment has a substantial relation, in a practical business sense, to that property". In your case, as you have entered into a contract for the sale of the new residential premises to the relevant entity for a specified price, it follows that the payment of the balance owing to you by the relevant entity would be made in connection with, in response to or for the inducement of the supply of land and building. For real property transactions, the supply (for GST purposes) occurs at the date of settlement. As the reduction to the selling price occurs prior to the time of sale, the consideration provided by the relevant entity is the discounted amount which is 95% of the GST-inclusive market value of the new residential premises. At the date of settlement, you will advance an interest free loan (Loan A) to the relevant entity. The amount of Loan A, that is, the principal, is 95% of the GST-inclusive market value of the new residential premises. Rather than go through the formality of advancing the loan moneys to the relevant entity only to have them immediately returning the amount by way of payment for the supply of the new residential premises, you and the relevant entity simply set off the obligation to advance the loan moneys to them against their obligation to pay for the supply, In this way the relevant entity's obligation to pay for the supply under the contract of sale is discharged and replaced with an obligation to repay the money lent under the contract for Loan A. In your circumstances, you make two supplies to the relevant entity: a supply of the new residential premises and a financial supply of Loan A. The consideration for the supply of the new residential premises is 95% of the GST-inclusive market value of those premises. You will receive this consideration at the time you supply Loan A to the relevant entity. Over the term of Loan A, the relevant entity is obliged to make regular payments. The total amount of payments received by you from them equals 95% of the GST-inclusive market value of the new residential premises. This amount is the principal of Loan A which the relevant entity is obliged to repay before and/or at the expiry of the term of Loan A. Paragraph 43 of GSTR 2001/6 provides: Consideration in the form of money, to be paid at a future time, is consideration expressed as an amount of money under subsection 9-75(1). The consideration is not the right to receive that money. For example, A agrees to supply goods to B in return for $10,000 to be paid 12 months after the date when the goods are delivered. The consideration is $10,000 and is expressed as an amount of money. The consideration is not the net present value of the $10,000. In your circumstances, for GST purposes, the consideration for the supply of the new residential premises is not the net present value of 95% of the GST inclusive market value of those premises (by discounting the principal of Loan A at certain interest rate over the term of Loan A). | Summary: Where the supply of the new residential premises is either: • less than 75% of the GST inclusive market value of the supply; or • less than 75% of the cost to the supplier of providing the accommodation,then the supply would be GST-free. | Detailed Reasoning - Detailed reasoning: You have asked if you have a GST liability for the sales of the new residential premises to the relevant entity. In your case as we have found that the consideration provided by the relevant entity is the discounted amount provided at settlement then what needs to be considered is whether you meet the requirements of section 38-250 of the GST Act when making a supply of new residential premises to the relevant entity. Pursuant to section 38-250 of the GST Act, non-commercial activities of endorsed charities will be GST-free. Supplies of new residential premises are GST-free under subparagraph 1(b)(ii) or 2(b)(ii) where the consideration for the supply is either: • less than 50% of the GST inclusive market value of the supply; or • less than 75% of the cost to the supplier of providing the accommodation. Therefore where the consideration for a supply of new residential premises is either: • less than 50% of the GST inclusive market value of the supply; or • less than 75% of the cost to the supplier of providing the accommodation, then the supply would be GST-free. As the consideration for the supply of new residential premises to the relevant entity is 95% of the GST-inclusive market value of those premises, you do not satisfy subparagraph 38-250(1)(b)(ii) or (2)(b)(ii) and you make a taxable supply and are liable to GST on the taxable supply. | Detailed Reasoning - Detailed reasoning: We issue private binding rulings (PBR) on the application of the GST law to the facts provided by you. Therefore if you advise that you • charge a fee as the selling price of a thing, or • incur a particular type of expenditure, or • estimate the number of sales we will determine how the GST law applies to the facts as provided. That is, we will determine whether you have: • a GST liability for the selling price (but not the amount of the liability), or • an entitlement to an input tax credit (but not the amount of the entitlement). The Commissioner does not consider himself to be bound by a PBR where - for the purposes of subsection 105-60(2) of Schedule 1 of the Taxation Administration Act 1953 - he is satisfied that an entity has misstated or suppressed a material fact or facts. Therefore, if, there are different or other material facts which you have not made known or disclosed to the Tax Office, or those facts change over the course of time and those facts vary or alter this ruling, then you should advise the Tax Office in writing of those facts and request a revised ruling. It is not the role of the PBR to determine the accuracy of the facts, e.g. • the amount of a fee charged, or • the amount of GST payable, or • the amount of a cost incurred, or • the amount of input tax credits entitled, or • the estimated number of sales. However, we may comment on whether the use of a particular method in apportioning an amount of cost to a particular type of expenditure is in accordance with our view. In your case, you have provided information outlining the purchase price of the properties and also the amount of GST calculated on the properties. On the basis of this information, you have a GST liability of $zz,zzz.zz for the sale of new residential premises to the relevant entities that you have already made.