Private ruling: GST and monetary and non-monetary consideration
Published: April 2013

Ruling: Q1: Will the Commissioner confirm that the supplies that are made under the arrangement are the following: a) Entity A will supply the works to Entity B. b) Entity A will transfer Entity A land to Entity B. c) Entity A will transfer other land to Entity B. d) Entity B has agreed to grant the Lease to Entity A for rent. e) Entity A as the Lessee will grant the Option to Entity B. f) Entity B will grant Entity A a Right of First Refusal? | A1: The Commissioner confirms that taxable supplies made by Entity A under the arrangement: · Entity A will supply the works (including the construction and the transfers of lands to Entity B). · Entity A, as the Lessee, will grant the Option to Entity B. In addition to the above taxable supplies made, the following transactions are considered to be taxable supplies received by Entity A under the GST Act: · Entity B has agreed to grant the Lease to Entity A, for rent · Entity B will grant Entity A a Right of First Refusal. | Q2: Will the Commissioner confirm that the consideration (monetary and non-monetary) for the supplies made by Entity A is comprised of: a) a monetary contribution to be paid by Entity B; b) the agreement to grant the lease to Entity A; c) the grant of the lease by Entity B to Entity A; d) the grant of the Right of First Refusal by Entity B to Entity A? | A2: The Commissioner confirms that the monetary and non-monetary consideration received by Entity A for the supplies it makes is comprised of: · a monetary contribution to be paid by Entity B · The granting of a long term lease to Entity A · The granting of the Right of First Refusal by Entity B to Entity A | Q3: Will the Commissioner confirm that the value of the supplies made by Entity A to Entity B is equivalent to approximately $ in value (exclusive of GST) and the value of the supplies (being also non-monetary consideration) made by Entity B to Entity A is equivalent in value? | A3: We consider that Entity A is acting at arm's length to Entity B, and therefore the goods, services or other things being exchanged are of equal market value. | Q4: Will the Commissioner confirm that Entity A should attribute the GST on its obligations under the arrangement after it receives any of the consideration from Entity B, namely, after the satisfaction of certain conditions as the parties are unconditionally bound at that time? | A4: Yes. Attribution is triggered in the tax period when any of the monetary or non-monetary consideration is received in relation to the taxable supplies Entity A makes.

Relevant facts and circumstances: The Development involves the construction of new premises. The development is to be undertaken by Entity A appointing a third party builder following a proposed tender. On practical completion of the development, Entity A is required to transfer all land to Entity B for $. Payments - Entity B must contribute $ (exclusive of GST) towards the cost of construction payable in stages. Lease - on practical completion Entity B must grant the Lease to Entity A. Under the Option, Entity B has the right to acquire Entity A's interest. Entity A also has a right of first refusal. The effect of the Option and the Right of First Refusal is that both Entity A and Entity B have reciprocal first rights to acquire each others' interest. You advise that the following supplies will take place: - Entity A will carry out the development as set out. The total anticipated construction cost is $. - Entity A will transfer all land to Entity B - Entity B has agreed to grant the Lease to Entity A - Entity A as the Lessee will grant the Option to Entity B. - Entity B will grant Entity A a Right of First Refusal. You have advised that: · the value of the supplies made by Entity B is equal to the value of the supplies made by Entity A less the monetary consideration of $. · the value of the supplies made by Entity A to Entity B is equivalent to approximately $ in value (exclusive of GST) calculated based on the following information being a fair and reasonable estimate of the components: 1. Land $ 3. Construction $ 4. Developer's Contribution $ 5. Option $ $ this value will be reciprocated by Entity B to Entity A. Therefore Entity B provides monetary and non-monetary consideration to Entity A and it is appropriate for the non-monetary consideration to be valued at approximately $ (exclusive of GST), as $ is being contributed by Entity B as monetary consideration. · GST will be payable by the respective parties to each other, in addition to the values set out above. · Entity A plans to issue to Entity B a tax invoice for its supply. It is expected that Entity B will issue Entity A a similar tax invoice for its obligations

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999: Section 9-5 | Section 9-10 | Subsection 9-10(4) | Section 9-15 | Subsection 9-75(1) | Subsection 29-5(1)

Reasons for decision: Detailed Reasoning - Preliminary Comments: There are a number of events (or activities) which are considered to be incidental to the dominant supplies and are events that enable the development to occur rather than also being the subject matter of the supplies. These events are covered under clauses and cover things such as classification, extinguishment, covenants, restrictions, termination rights and other satisfactions , lodgement, closures, application consents, reporting and notifications. These enabling events may fall under the definition of supply under section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 ( GST Act). However as these enabling events have not been made for any consideration, nor has any consideration been identified for them by either party, they would not satisfy the definition of a taxable supply (discussed in relation to Question 1) under the GST Act. In support of this view is Goods and Services Tax Ruling, GSTR 2001/4, Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) states: 30. Not every grant of a right or entry into an obligation will establish a supply that is subject to GST. Many business dealings involve the exchange of rights and obligations over time. However, these rights and obligations will merely form part of a larger transaction. … 31. The exchanges of rights and obligations over time form part of that transaction and are not separate supplies. Therefore as these enabling events are considered to be terms of the arrangement we have not regarded them to be dominant or substantive supplies. | Summary: Taxable supplies made by Entity A under the arrangement are: · Entity A will supply the development works, involving the construction of a new premises including the transfer of land to Entity B · Entity A, as the Lessee, will grant the Option to Entity B. Taxable supplies received (or acquisitions made) by Entity A are: · Entity B has agreed to grant a Lease to Entity A · Entity B will grant Entity A a Right of First Refusal. | Detailed Reasoning - Supplies: The meaning of supply is contained in section 9-10 of the GST Act and includes any form of supply whatsoever. Subsection 9-10(2) of the GST Act expands on the meaning of supply. This subsection provides that supplies include, but are not limited to: · a supply of goods and services ; · a creation, grant, transfer, assignment or surrender of any right; · an entry into, or release from, an obligation to do anything. The Deed is the governing document which outlines the objectives of the arrangement and identifies the respective rights and obligations between the parties as well as other things to be done by both parties such that the development can proceed. The other documents being the Lease; Option and Right of First Refusal prescribe further rights and obligations between Entity A and Entity B. Consequently, we consider that there are clearly distinguishable dominant or substantial supplies made under the arrangement. These supplies are made by Entity A to Entity B for a development and a number of rights and obligations. The Commissioner confirms that the dominant supplies made by Entity A to Entity B under the arrangement are: · Entity A will supply the Development to Entity B. · Entity A will grant the Option to Entity B. Now we need to consider whether these dominant supplies are taxable supplies under the GST Act. Taxable Supply A supply will be taxable when it satisfies the requirements outlined in section 9-5 of the GST Act which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an * enterprise that you *carry on; and (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. Note: The * denotes a defined term in the GST Act In Entity A's circumstances, requirements (b), (c) and (d) are satisfied and the supplies are not GST-free or input taxed. Requirement a) is discussed further. A taxable supply cannot exist unless there is a supply for consideration. There are three questions that are relevant to determining this question: · is there a supply (yes, as discussed above) · is there consideration (discussed further); and · does the necessary relationship exist between the supply and the consideration? (discussed further) A supply is a taxable supply if the supply is made for consideration. The definition of consideration in 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. A payment is not limited to money. It includes a payment in a non-monetary or in an 'in kind' form, such as: · Providing goods; · Granting a right or performing a service (an act); and · Entering into an obligation. Further, many transactions involve parties entering into multiple obligations. The question arises as to whether those obligations are consideration (or additional consideration) for a taxable supply. A payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. In determining whether a payment is in connection with the supply of an obligation, we consider that the test is whether there is a link or nexus that provides a substantial relationship between the substance of the obligation and the payment. In this case, the nexus between the supply and payment is underpinned by the documents. In relation to the documents, and as discussed in our preliminary comments, some rights or obligations listed are incidental events that enable the development to occur and are not the subject of matter of the supply. We do not view these enabling events as a form of consideration in relation to the dominant supplies. However, some rights granted by Entity B to Entity A in exchange for Entity A's supplies are of clear value to Entity A, have independent identity and therefore have been made as consideration. These rights are the lease and the right of first refusal. Therefore consideration, and the necessary relationship between the supply and the consideration, has been satisfied. Consequently Entity A will be making taxable supplies to Entity B in the form of: · The Development · The grant of the Option. Taxable supplies received by Entity A Based on the above principles and the information submitted, the following transactions are also considered to be taxable supplies that are received (that is, creditable acquisitions made) by Entity A: · Entity B's grant of the Lease · Entity B's grant of a Right of First Refusal. | Detailed Reasoning - Detailed reasoning: As discussed above, consideration includes any payment, act, forbearance, response to or inducement in connection with a supply of anything. Consideration also includes a payment in a non-monetary or 'in kind' form. Entity A receives the following non-monetary consideration from Entity B: · The grant of the Lease · The Right of First Refusal In addition, Entity B will pay $ to Entity A (monetary consideration). Therefore the consideration by Entity B (monetary and non-monetary) in relation to the taxable supplies made by Entity A is comprised of all of the above components. Please refer to the Reasons for Decisions in relation to Question 1 for further discussion regarding consideration. | Summary: As the consideration for the supplies made by Entity A to Entity B is comprised of both monetary and non-monetary components (and vice-versa), the GST inclusive market value of the non-monetary consideration is added to the amount of monetary consideration (without any discount for the amount of GST payable, if any) in order to determine full price and value of Entity A's supply. Based on the information provided, we consider that the parties to the arrangement are dealing at arm's length. Therefore we anticipate that the things exchanged are of equal GST inclusive market value. In such circumstances we would accept that market value is that which has been negotiated between arm's length parties. | Detailed Reasoning - Detailed reasoning: The amount of GST on a taxable supply is 10% of the value of the taxable supply. Under subsection 9-75(1) of the GST Act, the value of a taxable supply is the price x 10/11, where the 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. The GST inclusive market value of the total consideration will be shown as the price on any tax invoice that Entity A issues and the onus for determining the GST inclusive market value of any non-monetary consideration rests with the supplier, ie Entity A in relation to its taxable supplies to Entity B. The onus for determining the GST inclusive market value of the non-monetary consideration rests with Entity B in relation to their taxable supplies to Entity A. Paragraph 141 of Goods and Services Tax Ruling GSTR 2001/6, Goods and services tax: non-monetary consideration states: Market value is regarded as the price that would be negotiated at a specified time between a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller acting at arm's length in an appropriate market. It is an objective test and not the subjective view of any one party. From the information submitted we accept that the transaction in question is a normal commercial transaction and that Entity A and Entity B are dealing with each other at arm's length. Therefore, there is no reason to suggest that the market value agreed between the parties is not appropriate. As Entity A and Entity B are dealing at arms length, we are also of the view that the things exchanged by both parties are of equal GST inclusive market value. (This view is supported by the comments of McLelland CJ. in Solomon Pacific Resources NV v Acacia Resources Ltd (No 2) (1996) 14 ACLC 637 at 684. 'In the case of an honest arms-length transaction, it could generally be presumed that no discrepancy (such as between the value of the Solpac shares to be acquired and the fair value of the Acacia shares to be issued) would exist, and it could not be supposed that one party would be willing to acquire property for a consideration significantly greater than the perceived value to the acquirer of the property acquired). We note that the amounts of monetary consideration provided by each of the parties to the arrangement are different. For example, Entity A pays $ to Entity B with the rest of the consideration being non-monetary, while Entity B pays Entity A $ with the rest of the consideration being non-monetary. As the amounts of monetary consideration provided by the parties are different, and the overall values of the supplies exchanged are equivalent, it follows that the GST inclusive market value of the non-monetary consideration provided by each party will be different. We also note that input tax credits may be claimed for creditable acquisitions made by the respective parties (provided a valid tax invoice is held at the time of the claim). For further guidance, paragraphs 27-28 and 132-134 of GSTR 2001/6 explain a similar situation where both parties provide monetary and non-monetary consideration and sample calculations are given. | Detailed Reasoning - Conclusion: The Commissioner confirms that the supplies made, by Entity A to Entity B and by Entity B to Entity A, are equivalent in value. However, we note for the avoidance of doubt that in doing so the Commissioner is not confirming the specific amounts of the valuation in this private ruling. Under the law, you can apply for a private ruling about the value of a thing if necessary. Where you do this, you have two choices: · ask us to provide a valuation of the thing, or · provide us with a valuation of the thing and ask us to confirm it. We then use a professional valuer to undertake the valuation or review work. The Private rulings and valuations fact sheet (available on our website, NAT 71796) explains further what happens should you wish to apply for a private ruling about the value of a thing. | Summary: The Commissioner agrees with your view regarding attribution of GST. In this case, attribution is triggered in the first tax period where any of the consideration is received in relation to the taxable supplies Entity A makes. From the information submitted Entity A will receive some consideration when Entity A is granted the lease. | Detailed Reasoning - Detailed reasoning: Attribution The attribution rules are contained in Division 29 of the GST Act. Subsection 29-5(1) of the GST Act states: (1) The GST payable by you on a *taxable supply is attributable to: (a) the tax period in which any of the *consideration is received for the supply; or (b) if, before any of the consideration is received, an*invoice is issued relating to the supply - the tax period in which the invoice is issued. Where you account for GST on a non-cash basis, attribution is triggered in the earliest tax period in which any of the consideration is received for the supply or in which a tax invoice is issued to Entity B. In accordance with the documents, after certain conditions are satisfied, Entity B will be taken to have unconditionally agreed to grant Entity A the lease. Hence, after certain conditions are satisfied some of the consideration for the supply by Entity A to Entity B (non-monetary consideration in the form of the grant of the lease), will have been received and thus attribution is triggered in that tax period. Should any consideration be provided by Entity B at an earlier time then attribution will be triggered in that earlier tax period.