Private ruling: GST and adjustments
Date of advice: 21 August 2018
Published: October 2018

Ruling: Q1: Did you have an increasing adjustment under Division 19 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) in relation to the input tax credits claimed for the Option Fees paid under the Irrecoverable Offer and Put Option Deed (the Deed) in respect of Property A and Property B? | A1: Yes. | Q2: If the answer to question one is yes, is the methodology proposed by you to determine the amount of the increasing adjustment, fair and reasonable? | A2: Yes.

Relevant facts and circumstances: You are registered for GST from DDMMYYYY. You carry on an enterprise of developing and selling commercial and new residential premises in Australia. On DDMMYYYY you and Entity B (Vendor) executed an Irrecoverable Offer and Put Option Deed (the Deed) in respect of: ● Property A ● Property B. You have provided a copy of the Deed. The Option Fees were paid in two instalments: ● 25% of the Option Fees being $X (inclusive of GST) on the making of the Deed. ● 75% of the Option Fees being $X (inclusive of GST) by DDMMYYYY. The Vendor issued you with two tax invoices dated DDMMYYYY for the Option Fees (the Tax Invoices). The Tax Invoices were issued on the basis the whole of Property A and Property B was a fully taxable supply. It was the intention of the Vendor to sell Property A and Property B with vacant possession (clause X to the Deed). You have provided a copy of the Tax Invoices. In the tax period ending DDMMYYYY, you claimed full input tax credits equal to 1/11th of the amounts paid on account of the Option Fees (ie $X), the tax period in which you held a tax invoice. On DDMMYYYY the Vendor and you amended the Deed (by way of a variation letter) and agreed that Property A will be supplied partially tenanted such that the land would be supplied subject to the leases and therefore partially GST free as a going concern. You have provided a copy of the Deed Variation Letter. You were on quarterly GST reporting when you made the above amendment to the Deed (by way of a variation letter). On DDMMYYYY the Vendor and you amended the Deed by way of a Deed of Variation and agreed that Property B would be supplied fully tenanted such that the land would be supplied subject to the leases and therefore wholly GST free as a going concern. You have provided a copy of the Deed of Variation. You were on quarterly GST reporting when you made the above amendment to the Deed by way of Deed Variation. On DDMMYYYY, the contract for the sale of Property A was executed in accordance with the amended Deed. You have provided a copy of the contract for the sale of Property A. You and the Vendor agreed that: ● Pursuant to the Deed the Option Fee was applied as a deposit for the purchase of Property A. ● The supply of Property A would rather than being supplied as a fully taxable supply would rather be partially sold as a GST-free supply of a going concern (being the leased portion) and the remaining part of Property A would be sold as fully taxable (and would not be supplied under the margin scheme). ● The total consideration would be apportioned on a fair and reasonable basis (based on area) being X% for that part of the supply that was a GST-free going concern and X% for that part of the supply that was a taxable supply not under the margin scheme. On DDMMYYYY (the settlement date) you acquired Property A from the Vendor as a partially GST-free supply. On DDMMYYYY, the contract for the sale of Property B was executed. You have provided a copy of the contract for the sale of Property B. On DDMMYYYY (settlement date) you acquired Property B in accordance with the amended Deed, and the sale was a GST-free going concern on the basis that the entire premises continued to be leased at settlement. You acquired Property A and Property B for the purposes of developing the property for sale as a mix of new residential and commercial premises. Property A consisted solely of offices and associated car spaces, and the purchase price was apportioned based on the respective areas. Specifically, at settlement, the property was partially leased and the area of their tenancies constitutes X% of the total lettable area, and the remaining X% of the property was vacant at settlement (and treated as a taxable supply). You propose to make an increasing adjustment by applying the same percentages calculated for the supply of Property A and Property B to your Option Fee payments to determine the correct input tax entitlement for those payments.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-17(1) | A New Tax System (Goods and Services Tax) Act 1999 Division 19 | A New Tax System (Goods and Services Tax) Act 1999 Subsection 29-20(1)

Reasons for decision: Summary: Division 19 is about adjustment events and explains how an adjustment event for a supply or acquisition can give rise to an increasing adjustment or a decreasing adjustment. An adjustment event includes, amongst others, any event which has the effect of causing an acquisition to stop being creditable acquisition (paragraph 19-10(1)(c)). Section 19-80 which is about increasing adjustments for acquisitions states: If the *previously attributed input tax credit amount is greater than the *corrected input tax credit amount, you have an increasing adjustment equal to the difference between the previously attributed input tax credit amount and the corrected input tax credit amount. In your case, the following events have transpired: ● On DDMMYYYY: ● You entered into the Deed which related to a fully taxable supply of Property A and Property B. ● The Vendor issued you with two tax invoices dated DDMMYYYY for the Option Fees (the Tax Invoices) you were required to pay. ● In the tax period ending DDMMYYYY, you claimed full input tax credits for the Option Fees. Guidance on call options granted over real property is contained in Goods and Services Tax Determination GSTD 2014/2 Goods and services tax: where real property is acquired following the exercise of a call option, does the call option fee form part of the consideration for the acquisition for the purposes of subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999? Relevantly, paragraphs 16 and 17 of GSTD 2014/2 state: 16. Where an entity has exercised a call option to compel the transfer of real property, for GST purposes, the call option fee does not form part of the consideration for the property. 17. This is the case even if the agreement between the parties specifies that the call option fee forms part of the price for the supply of the real property. The operation of section 9-17 varies what may be the outcome under contract law. Paragraph 21 of GSTD 2014/2 provides further that in the context of a call option over real property, subsection 9-17(1) recognises that the supply of the option is a separate supply to the supply of the underlying property. As a consequence of subsection 9-17(1), the consideration for the call option is the call option fee, and the consideration for the supply or acquisition of the underlying property is limited to any additional consideration provided. In your case, as outlined above, the granting of the call option was a separate supply with the Option Fees attributable at that time. This aligns with your GST treatment of claiming the input tax credits at that time. The term ‘real property’ is defined in section 195-1 and relevantly includes a personal right to call for or be granted any interest in or right over land. In your case, at the time of paying the Option Fees, you acquired an option over an interest in a fully taxable supply of commercial property as outlined in the agreement (the Deed). You claimed full input tax credits for your payments of the Option Fees. Subsequent to you claiming full input tax credits for the Option Fees, the following events have transpired: ● On DDMMYYYY, you and the Vendor amended the Deed (by way of a variation letter) to confirm that the Property A would be supplied partially tenanted and therefore partially GST-free as a going concern. ● On DDMMYYYY you and the Vendor amended the Deed (by way of a Deed of Variation) to confirm Property B would be supplied fully tenanted and therefore wholly GST free as a going concern. ● On DDMMYYYY, the contract for the sale of Property A was executed in accordance with the amended Deed. ● On DDMMYYYY (the settlement date) you acquired Property A from the Vendor as a partially GST-free supply of a going concern. ● On DDMMYYYY, the contract for the sale of Property B was executed. ● On DDMMYYYY (settlement date) you acquired Property B from the Vendor as a wholly GST-free supply of a going concern. Goods and Services Tax Ruling GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events explains the Commissioner's view on the operation of Division 19. Paragraph 10 of GSTR 2000/19 provides, in part: 10. …An adjustment arises under Division 19 where an adjustment event has caused you to have accounted for: ● … ● too much (or too little) input tax credit for an acquisition in a previous tax period. In your case, an adjustment event has occurred when you agreed to amend the Deed. You claimed an input tax credit on the basis of a fully taxable supply of Property A and Property B. This basis changed when you varied the Deed to account for a partially and fully GST-free supply of Property A and Property B. This has caused you to have accounted for too much input tax credit in the tax period ending DDMMYYYY. Subsection 29-20(1) provides: (1) An adjustment that you have is attributable to the tax period in which you become aware of the adjustment. In your case, you became aware of the adjustment event on: ● DDMMYYYY when you agreed to amend the Deed (by way of a variation letter) for Property A to be supplied partially GST-free as a going concern. ● DDMMYYYY when you agreed to amend the Deed (by way of a Deed of Variation) for Property B to be supplied wholly GST free as a going concern. The adjustment event occurred when you amended the Deed by way of a Deed Variation Letter and by way of a Deed of Variation. Pursuant to subsection 29-20(1) your increasing adjustment (under section 19-80) is attributable to the MMYYYY quarter for Property A and MMYYYY quarter for Property B. Goods and Services Tax Ruling GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events explains the Commissioner's view on the operation of Division 19. Paragraph 91 of GSTR 2000/19 states: 91. An adjustment will arise, in relation to an acquisition, where an adjustment event has caused the previously attributed input tax credit amount to differ from the corrected input tax credit amount. … You need to work out the two amounts and then compare them to determine if an adjustment arises because of the adjustment event. In your case, In the MMYYYY quarter you claimed an input tax credit of 1/11 th of the Option Fees on the basis that the supply of Property A and Property B would be 100% taxable. As explained in question one, an adjustment event occurred which required you to adjust the previously attributed input tax credit amount. Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts provides methods and examples that can be used to help you work out how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable parts. Paragraphs 97 and 106 of GSTR 2001/8 states, in part: | Detailed Reasoning - Direct methods: 97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include: ● … ● the relative floor area in a supply of property (see paragraphs 106 to 108 of this Ruling). … | Detailed Reasoning - Relative floor area in a supply of property: 106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas. You have agreed with the Vendor that that the consideration for the purchase of Property A and Property B will be as follows: ● Property A is apportioned to be X% GST-free and X% taxable not under the margin scheme. ● Property B is 100% GST-free. You have agreed with the vendor that a fair and reasonable basis of apportionment for Property A is on the basis of area. Property A consisted solely of offices and associated car spaces. The purchase price was apportioned between the area leased (GST-free) and the area vacant (taxable). Property B was wholly leased. Your proposed methodology for your increasing adjustment is to apply the same apportionment to the Option Fee. We consider that the methodology you are adopting to determine your increasing adjustment is fair and reasonable.