Private ruling: Goods and services tax (GST) and property
Date of advice: 23 March 2016
Published: May 2016

Ruling: Q1: 1. Will Entity B make a taxable supply of Development Works to Entity A? | A3: Yes | Q2: 1. Will Entity B make a creditable acquisition of the Sale Offers? | A6: Yes | Q3: Will Entity B make a creditable acquisition of goods and services from the Approved Builder? | A7: Yes | Q4: 1. Will Entity B make a creditable acquisition of the Sale Lots from Entity A? | A9: Yes | Q5: Upon Entity B making a future supply of a Sale Lot to a third party: 1. Will Entity B make an input taxed supply under section 40-65? | A12: N/A

Relevant facts and circumstances: Note The following documents have not been drafted at the time of this ruling application and have not been considered when preparing a response to the questions posed: • The Side Deed • Post Settlement Disposal programme Entity B (you) are a company limited by guarantee. The objects of Entity B are set out in its Constitution. You are an "ACNC-registered charity" as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and have been endorsed by the Commissioner as a charity under section 176-1 of the GST Act. You are registered for GST and account for GST on an accruals basis. The sole member of Entity B is Entity C. Entity C is a charity registered by the ACNC. Entity C is a public benevolent institution endorsed to access the GST concession, the income tax exemption and the fringe benefits tax exemption. Entity C is also a deductible gift recipient. Entity A is registered for GST. Entity A issued a Call for Submissions (CFS) seeking submissions to increase the supply of affordable housing. Entity C responded to the CFS with a proposal that puts forward an investment model for the development of a portfolio of affordable and social housing to be built on land to be made available by Entity A. Entity C was awarded in principle the right to develop the Development Lots. Entity C then nominated you to enter into a Development Agreement with Entity A. Pursuant to the Development Agreement, the Approved Builder and Entity A will enter into the Development Licence. Pursuant to the Development Agreement: (a) You will supply the Development Works to Entity A resulting in dwellings being constructed on the Development Lots and the Development Lots being subdivided into the Subdivided Lots. (b) In order to fulfil your obligation to supply the Development Works to Entity A, you will acquire goods and services from the Approved Builder on commercial terms. You will pay the Approved Builder using finance from the Funding Provider. (c) Upon practical completion and independent certification of the Development Works, Entity A will irrevocably offer to sell the Offer Lots to you on the terms of the Sale Contract. (d) If you accept a Sale Offer and pay the nominal purchase price of $X, Entity A will transfer the Sale Lot to you in accordance with the Sale Contract; and (e) Entity A will retain the Retained Lots (including any Offer Lots in respect of which you do not accept the Sale Offer); You will use each Sale Lot to supply residential accommodation for consideration that is less than 75% of the GST inclusive market value of the supply. In relation to the Retained Lots, it is conceivable that Entity A will either: (a) Lease them to you, in which case you will sub-lease each Retained Lot in order to supply residential accommodation for consideration that is less than 75% of the GST inclusive market value of the supply; or (b) Appoint you (or Entity C) to manage the leasing of each Retained Lot from Entity A directly to a social housing tenant. You may from time to time, in the future, need to sell some or all of the Sale Lots in order to service the finance for the Development Works and to repay the Funding Provider. Such future sales will be conducted in accordance with the Post Settlement Disposal programme to be agreed between Entity A, you and the Funding Provider having regard to the objective of increasing the supply of affordable housing. You have provided the following documentation in support of your ruling application: 1. Entity B Constitution 2. Development Licence entered into between Entity B and Entity A 3. Agreement for Licence

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 195-1, | 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 11-15, | A New Tax System (Goods and Services Tax) Act 1999 Section 38-250, | A New Tax System (Goods and Services Tax) Act 1999 Subsection 176-1(1), | A New Tax System (Goods and Services Tax) Act 1999 Section 11-20, | A New Tax System (Goods and Services Tax) Act 1999 Section 11-5, | A New Tax System (Goods and Services Tax) Act 1999 Section 9-17, | A New Tax System (Goods and Services Tax) Act 1999 Section 40-65 and | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75.

Reasons for decision: Detailed Reasoning - (i) The full costing of the Development works undertaken by you; or: (ii) The difference between the market value of the Sale Lots at the time of the Sale Offers and the aggregate purchase price payable under the Sale Contracts? 3. Will you be able to issue an invoice for the Development Works and attribute its GST liability to the tax period in which practical completion and independent certification of the Development Works occurs (being the same tax period in which Entity A makes the Sale Offers)? Section 9-5 provides that 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 the indirect tax zone; 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. In your case, the supply is made in the course of your enterprise, is connected with the indirect tax zone and you are registered for GST. Further, the supply of Development Works will not be GST-free or input taxed. Finally, we must examine the nature of any consideration you receive for the supply of Development Works to Entity A. 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. Paragraph 12 of Goods and Services Tax Ruling GSTR 2001/6, Goods and services tax: non-monetary consideration (GSTR 2001/6) states that a 'payment' is not limited to a payment of 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, for example to refrain from selling a particular product (a forbearance). The definition of a taxable supply requires, among other things, that you make a supply for consideration. There needs to be a supply, a payment and the necessary relationship between the supply and the payment. Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is a sufficient nexus between the supply and the payment as consideration. The same analysis applies in determining whether a good, service or thing is non-monetary consideration for a supply. Paragraphs 80 to 81 of GSTR 2001/6 provide that the test for determining whether a payment is consideration for a supply is whether there is sufficient nexus between the supply and the payment. Consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction [emphasis added]. Paragraphs 33-37 of Goods and Services Tax Ruling Goods and services tax: development lease arrangements with government agencies (GSTR 2015/2) consider the respective supplies between the Developer and a government agency under development lease/licence arrangements. While you have not entered into a licence with government agency, the principles in this ruling as they relate to supplies of development services in exchange for interests in real property are applicable to your circumstances. These paragraphs state: 33.In completing the development works on the government agency's land, in accordance with the terms of a development lease arrangement, the developer makes a supply of development services to the government agency. 34. The supply of the land to the developer by the government agency is consideration for the developer's supply of development services if there is a sufficient nexus between supply of the development services and transfer of the land. 35. There is a sufficient nexus between the development services and the transfer of freehold or grant of a long-term lease if the development lease arrangement makes the supply of the land subject to or conditional on the developer completing specified development works. For example, the developer only becomes entitled to the freehold or long-term lease on completion of the development or a particular stage of the development. 36. In some cases, under the terms of a development lease arrangement, the government agency grants a call option to the developer. When exercised, the call option entitles the developer to the transfer of the freehold or a long-term leasehold interest in the land. The grant of a call option by the government agency is consideration for the developer's supply of development services if the grant of the call option is subject to or conditional on the developer completing specified development works. 37. Where the circumstances set out in paragraphs 33 to 36 of this Ruling apply, supply of development services by the developer is, in turn, consideration for the supply of the land or the grant of a call option by the government agency. The developer makes a taxable supply of development services and the government agency makes a taxable supply of land or a taxable supply of the grant of a call option. In your case, Clause X of the Development Agreement details the Development Works to be undertaken by you. Clause X of the Development Agreement outlines the obligations of Entity A pursuant to Clause X and states: Sale offer In consideration of the Developer carrying out the Development Works under clause X, within 5 Business Days after the date of a final IC Notice in respect of the whole of, or the last part of, a Separable Portion, the Licensor must make an offer to the Licensee to sell the Offer lots which form part of that Separable Portion the subject of the Final IC Notice, by giving to the Licensee: (a) an Offer Notice; and (b) a Sale Contract for each Offer Lot (in duplicate): (i) completed with particulars of each Offer lot and the purchase price in accordance with clause X; and (ii) executed by the Licensor (Sale Offer) Further Clause X provides that on acceptance of a Sale Offer, you must give Entity A an Acceptance Notice and a Sale Contract for each sale lot. The Sale Offer may be accepted in respect of some or all of the Offer Lots. For the sake of completeness, we note that Clause X of the Development Agreement stipulates that the following are taxable supplies: (a) the supply of the Development Works under Clause X, is for the consideration of the Sale Offer; (b) the supply of the Sale Offer under Clause X is for a consideration equal to the market value of the Development Works. The grant of the Sale Offers by Entity A is consideration for the Development Works undertaken by you on the Development lots. That is, the consideration (being the Sale Offers) is 'in connection with', 'in response to' or 'for the inducement of' the supply of the Development Works and are conditional on you completing specified development works. You are not entitled to the grant of the Sale Offer until the Independent Certifier has issued a Notice signifying that that all of the Development Works in respect of the relevant Portion of land have achieved Practical Completion. Consequently, the supply of Development Works by you to Entity A is a taxable supply as all the requirements of section 9-5 are met. Valuation of non-monetary consideration provided for supplies made under the development licence: Where the consideration for a supply is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply. Where the parties to a transaction are dealing with each other at arm's length, the Commissioner considers that the things exchanged between the parties are of equal GST inclusive market value. In the context of a development lease arrangement between a government agency and a developer, the parties can use a reasonable valuation method as agreed between them to determine the GST-inclusive market value of any non-monetary consideration for supplies arising in the context of a development lease arrangement. Paragraph 70 of GSTR 2015/2 states: For example, the full costing of the development works, undertaken by the developer as part of a competitive tender process, which takes into account the full cost of construction (including builder margins), provides a reasonable basis for determining the GST-inclusive market value of the supply of development services by the developer. It also provides a reasonable basis for calculating the price of the government agency's related supply of land (or grant of a call option). In your case, you have indicated that it is likely that you will use the method outlined in paragraph 70 of GSTR 2015/2 to determine the GST-inclusive market value of the supply of the development services by you. This is consistent with the Commissioner's view and reasonable in your circumstances. Alternatively, you have stated that the GST inclusive value will be calculated based on the difference between the market value of the Offer Lots at the time the Sale Offers are made and the aggregate purchase price payable under the Sale Contracts. The Commissioner considers that this is also a reasonable valuation method. Attribution In the context of this transaction, attribution of a GST liability or a corresponding input tax credit entitlement is required in the tax period in which: • a monetary payment is received, or • some or part of the non-monetary consideration is received, or • an invoice is issued whichever is earlier. Paragraphs 93 and 94 of GSTR 2015/2 consider the attribution of the Developer's GST liability for its taxable supply of development services. These paragraphs state: 93. Non-monetary consideration, comprising the transfer of the freehold or long term leasehold interest in land (or in other cases, the grant of a call option), for the supply of development services made by a developer, is provided in full immediately on the transfer of the freehold or long term leasehold interest (or immediately on the grant of the call option in applicable cases). 94. In circumstances where no monetary consideration has been provided in an earlier tax period and no invoice has been issued in an earlier tax period, the developer's GST liability for its taxable supply of development services is attributable to the tax period in which the freehold or long-term leasehold interest in the land is transferred (or the call option granted). Paragraph 106 of GSTR 2015/2 states further: 106. If none of the consideration (monetary or non-monetary) for the developer's supply of development services has been received by the developer in an earlier tax period, the developer's GST liability for its taxable supply of development services is attributable to the tax period in which the invoice is issued. In turn, any corresponding input tax credit that the government agency is entitled to for its acquisition of the development services is attributable to that same tax period. In your case, Entity A, pursuant to Clause X of the Development Agreement, will make an offer to you, to sell the Offer Lots within five Business Days after the date of a Final IC Notice (being the notice given by the Independent Certifier under clause 11.6(c)(II) which signifies that all of the Development Works in respect of the relevant separable portion have achieved Practical Completion) being issued. No non-monetary consideration (in the form of the Sale Offers by Entity A) for the supply of the development services is received by you prior to practical completion of the development. Consequently, you will attribute the taxable supply of Development Services in the period in which the Sale Offers are made by Entity A. | Detailed Reasoning - Question 2: 1. Will you make a creditable acquisition of the Sale Offers? 2. If the answer to (1) is yes, will the consideration be limited to the Development Works? 3. Will the market value of the Development Services be equal to the market value of the Sale Offers? The term 'creditable acquisition', is defined in section 11-5 as follows: You make a creditable acquisition if: (a) You acquire anything solely or partly for a creditable purpose; and (b) The supply of the thing to you is a taxable supply; and (c) You provide, or are liable to provide, consideration for the supply; and (d) You are registered, or required to be registered. 'Creditable purpose' is defined in section 11-15 as follows: (1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: • The acquisition relates to making supplies that would be input taxed; or • The acquisition is of a private or domestic nature. In your case, providing the supply made by Entity A to you is a taxable supply, requirements (b) and (d) will be met. Further, as explained in Clause 37 of GSTR 2015/2, the supply of development services by you is consideration for the supply or grant of a call option by Entity A. Consequently, requirement (c) is met. The only other major determinant is whether the acquisition from Entity A is for a creditable purpose. Pursuant to the Objects of Entity B, as detailed in the Constitution of the company, you will, on acquiring each Sale Lot following the acceptance of a Sale Offer from Entity A, construct residential accommodation thereon which you will use to supply residential accommodation for consideration that is less than 75% of the GST inclusive market value of the supply. Section 38-250 states that a supply is GST-free if: (a) The supplier is an *endorsed charity, a *gift-deductible entity or a *government school; and (b) The supply is for* consideration that: (i) If the supply is a supply of accommodation - is less than 75% of the *GST inclusive market value of the supply; or (ii) … The term endorsed charity is defined under subsection 176-1(1) as follows: (1) The Commissioner must endorse an entity as a charity if: (a) The entity is entitled to be endorsed as a charity (see subsection (2)); and (b) The entity has applied for that endorsement in accordance with Division 426 in Schedule 1 to the Taxation Administration Act 1953 . (2) An entity is entitled to be endorsed as a charity if the entity: (a) is an *ACNC-registered charity; and (b) has an *ABN You are an "ACNC-registered charity" as defined in section 195-1 and has been endorsed by the Commissioner as a charity under section 176-1. Therefore, its supplies of accommodation will be GST-free under section 38-250. Consequently, to the extent that you make GST-free supplies, the acquisition of the Sale Offers are for a creditable purpose and will be a creditable acquisition. You advise that you do not intend at the time of acquisition to on-sell the residential premises on the Sale Lots. In the future you may need to sell some of the residential premises to meet financial obligations and these sales would be input taxed (see Question 6 below). However it is not your intention, at the time of acquiring the Sale Offers, to do so. Therefore, at the time of acquisition, the acquisition of the Sale Offers do not relate to making input taxed supplies. As outlined in Question 1 above, the parties can use a reasonable valuation method as agreed between them to determine the GST-inclusive market value of any non-monetary consideration for supplies arising under the arrangement. As the parties are transacting at arm's length, the GST-inclusive market value of the non-monetary consideration for each respective supply (by Entity A of the Sale Offers and you of Development Services) will be of equal value. | Detailed Reasoning - Will you make a creditable acquisition of goods and services from the Approved Builder?: Section 11-20 states that you are entitled to the input tax credit for any creditable acquisition that you make. As outlined in Question 2, the term 'creditable acquisition' is defined in section 11-5. The Constitution of Entity B provides that one of its primary objectives is to assist in the alleviation of poverty through the provision of social and affordable housing. In order to achieve this objective, the activities of Entity B include: (i) the provision of development works [as defined] to Entity A and the creation of developed lots. You will satisfy this obligation to carry out the development works by contracting the Approved Builder to provide the development services. (ii) the purchase of "Offer Lots" from Entity A; (i) the provision of lease accommodation to low income groups for consideration that is less than 75% of the GST inclusive market value of the supply. (ii) the lease of the retained lots [as defined] from Entity A; and (iii) the provision of lease accommodation on the retained lots for consideration that is less than 75% of the GST inclusive market value of the supply; and (iv) the sale of some or all of the lots to service and /or retire the finance raised from third parties to pay the consideration for the Development Services. We accept that you conduct an enterprise which includes the above objectives. Consequently, where the Builder makes a taxable supply to you, we consider that the acquisition of the development services is a creditable purpose as the building services will be acquired in the course or furtherance of your enterprise and do not relate to making input taxed supplies nor are for a private or domestic purpose. The acquisition of the building services is a creditable acquisition as for a creditable purpose, you will be liable to provide consideration for the supply and you are registered for GST. | Detailed Reasoning - 2. Will the consideration be limited to the nominal purchase price payable under the Sale Contracts?: As outlined in Question 2 the term 'creditable acquisition' is defined in section 11-5. In your case, provided the supply made by Entity A to you is a taxable supply, requirements (b) and (d) will be met. Clause X of the Development Licence outlines the Sale Contract Terms. In particular, Clause X states that: (a) The purchase price for each Sale lot is $X (including GST). Section 9-17 deals with certain payments and other things not consideration. It states: (1) If a right or option to acquire a thing is granted, then: (a) the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option; or (b) if there is no such consideration - there is no consideration for the supply. As the Sale Offer made by Entity A to you is a right granted by Entity A to you, the consideration, in this case, for the supply of the Offer Lot on the exercise of the Offer is limited to $X, being the additional consideration paid by you. Consequently, item (c) is satisfied. Clause X of the Agreement for Licence outlines that an appropriate cash adjustment may need to be made between the parties and states: (ii) as part of the determination of the Division of Portfolio, the parties must agree on an appropriate cash adjustment (if any) between them, in the event that the Market Value of the Retained lots or the Market Value of the Entity B Allocation does not equate exactly to the result achieved by applying the valuation and allocation principle set out in clause X or as otherwise agreed by the parties, and in that regard the following principles will apply: (A) If an adjusting payment needs to be made, this must be agreed by the parties at the same time as the determination of the Division of Portfolio; and (B) the adjusting payment (if any) must be made between the parties (as applicable) on the date of settlement of the transfer of the Entity B Allocation to Entity B under the Development Licence, provided that where the Project is carried out by way of Separable portions, the parties must at the same time as agreeing on the Division of Portfolio, agree on an allocation of part of the adjustment to each settlement tranche proportionate to the value of the Dwelling units being transferred. Where you are required to make a cash adjustment payment, the payment will also be additional consideration for the supply of the Lot. The only other major determinant is whether the acquisition from Entity A is for a creditable purpose. As outlined in Question 3 above, your supply of accommodation will be GST-free pursuant to section 38-250. As outlined in Question 3 above, you will use the Sale Lots for the creditable purpose of making GST-free supplies of accommodation. Although it is a possibility, you have confirmed that you have no intention to sell the Lots after you acquire them and you are not intending to make any input taxed supplies of residential premises. Therefore, your acquisitions did not meet the negative limb of paragraph 11-15(2)(a) and accordingly were regarded as being made for a wholly creditable purpose. . Consequently, to the extent that you make GST-free supplies, the acquisition of the Offer Lot from Entity A will be for a creditable acquisition. | Detailed Reasoning - (c) Will Division 129 apply to you when the extent of creditable purpose is changed?: Under subsection 40-65(1), a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However, subsection 40-65(2) states that the sale is not input taxed to the extent that the residential premises are: (a) *commercial residential premises; or (b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. Input taxed means that there is no GST payable on the supply and there is no entitlement to an input taxed credit for anything that is acquired to make the supply. The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation). In your case, the units constructed will be residential premises. According to the facts, that make up the arrangement on which this private ruling is based, the premises are not commercial residential and they were not used for residential accommodation before 2 December 1998. The term 'new residential premises' has the meaning given by section 40-75, which in part states: | Detailed Reasoning - 40-75 Meaning of new residential premises: When premises are new residential premises (1) *Residential premises are new residential premises if they: (a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; (b) …; or (c) … Paragraphs (b) and (c) have effect subject to paragraph (a). Upon practical completion and independent certification of the Development Works, Entity A will offer to sell the Offer Lots to you. If you accept a Sale Offer and pay the nominal purchase price of $X, Entity A will transfer the Sale Lot to you in accordance with the Sale Contract. This will be a sale of the residential premises. When you make a supply of the Sale Lot, it will have previously been sold as residential premises. Therefore your future supply of the Sale Lot will not be a supply of new residential premises. Your supply will be input taxed. Under Division 129 of the GST Act, you are required to monitor the extent to which your acquisition continues to be applied to a creditable purpose. Where there is a change in the extent to which you have applied a thing to a creditable purpose, such as selling the premises (input taxed supplies), you may be required to make an adjustment. If after acquisition of the Sale Offers and the Sale Lots, you sell, one, some or all, of the residential premises, this will be a change in the extent to which you have applied the Sale Offers and the Sale Lots for a creditable purpose. In relation to the acquisition of the Sale Lots, as they will be for $X each, no adjustments can arise under Division 129 for these acquisitions as they are below $1,000 (subsection 129-10(2)). However, in relation to the acquisition of the Sale Offers, the GST exclusive value will exceed $1,000 and it is necessary to determine if an adjustment arises. An adjustment arises where the intended or former application of a thing is different to the actual application of the thing. In determining the 'actual application of the thing' for the purposes of section 129-40 it is necessary to look at the extent to which the residential premises are applied for a creditable purpose and therefore applied, or in other words, used, in relation to making input taxed supplies. 'Creditable purpose' for the purposes of Division 129 is defined in section 129-50 in similar terms to section 11-15 and states that: '…you do not apply a thing for a creditable purpose to the extent that: (a) the application relates to making supplies that are input taxed;…'. We consider that the relationship can be direct or indirect as long as it is material or sufficient, as with section 11-15. While a call option to purchase residential premises is exercised before the acquisition of the residential premises themselves, in determining whether the acquisition of the call option is for a creditable purpose, we consider that it is necessary to look to the use of the residential premises given that the residential premises are the subject of the option. It is not sufficient to look only to the character of the supply upon exercising the option (in this case, the acquisition of new residential premises as a taxable supply). To the extent that the residential premises are applied to make input taxed supplies, the acquisition of the call option will relate to making input taxed supplies and will not be for a creditable purpose. This approach applies equally in Division 11 and Division 129 in relation to options.

2. If the answer to (1) is yes, will the GST inclusive market value of the consideration be equal to: | (i) The full costing of the Development works undertaken by Entity B; or | 3. Will Entity B be able to issue an invoice for the Development Works and attribute its GST liability to the tax period in which practical completion and independent certification of the Development Works occurs (being the same tax period in which Entity A makes the Sale Offers)? | 3. Will the market value of the consideration be equal to the market value of the Sale Offers? | 2. Will a Sale Lot be "new residential premises" under section 40-75? | 3. Will Division 129 apply to Entity B when the extent of creditable purpose is changed? | • 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. | • For the purpose of this ruling, we have not been able to view the following documents referenced in the Agreement for Licence. To the extent that the arrangements or obligations outlined in these documents differ from the Agreement for Licence or the Development Licence, this ruling cannot be relied upon: