Private ruling: GST and development services
Date of advice: 4 September 2017
Published: December 2017

Ruling: Q1: Did Entity A make a taxable supply of Development Services to the government agency in relation to the development of real property (the Land) and in accordance with the obligations set out in the Transaction Documents for the Project? | A1: Yes. | Q2: Are the Development Services provided by Entity A to the government agency non-monetary consideration for Entity A’s acquisition of the Land from the government agency? | A2: Yes.

Relevant facts and circumstances: Entity A is an Australian Private Company that is registered for GST. Entity A has entered into a commercial arrangement with a government agency (Entity B for the acquisition and development of land (the Land) by constructing residential units on the Land. The arrangement is governed by the following documents (the Transaction Documents): ● Contract For Sale (Contract) ● Project Delivery Agreement (PDA) ● Lease Entity B entered into the Contract to grant, or procure the grant of the Lease over the Land to Entity A, for the purchase price (the Purchase Price). The PDA is Annexure C of the Contract and was entered into on the same date as the Contract. Its purpose was to set out the obligations of Entity A with respect to developing the Land. Completion of the Contract occurred (Completion) and a Lease was granted. The Transaction Documents include a number of mechanisms to ensure that Entity A satisfactorily completes certain development works within the agreed timeframe. The relevant clauses in these documents are outlined below. Under the Contract: ● Entity B will grant the lease over the Site, upon completion of the Contract. ● The pertinent special conditions are: ● Entity A must comply with the Development Guidelines. ● The Contract is contingent upon the parties entering into the PDA prior to or at the same time as the contract. ● Entity A must comply with all of its obligations under the PDA, including, but not limited to its obligations in respect of the Development Guidelines. ● Entity A must not complete any agreement for the sale of, or permit any transfer to be registered in respect of the Land (wholly or partly) or in respect of any dwelling (whether erected or to be erected) on the Land, prior to Entity A having complied with all its obligations under the PDA. ● Entity A agreed to Entity B retaining and using (if required) the ‘Security’ payable by Entity A to Entity B, for the performance by Entity A of its obligations under the Contract and the PDA. The term ‘Security’ in the Contract means the security payable by Entity A under the PDA (see below). ● Entity A acknowledged and consented to Entity B registering a charge or caveat over the Lease. Under the PDA: ● The Developer, being Entity A has agreed that it will, in developing the Land, comply with the obligations set out in the PDA. ● Entity A must design and construct all buildings on the Land, consistent with all applicable laws, the Development Guidelines (annexed to the PDA) and the terms and conditions contained in the PDA. ● With respect to Entity B’s endorsement of the Initial Development Application: ● Entity A agrees to consult with Entity B and seek endorsement from Entity B for the Initial Development Application (DA) prior to the lodgement of the DA. ● Entity B will endorse the DA if it complies with the Development Guidelines and applicable laws, and includes all changes reasonably required by Entity B. ● Entity A is required to submit the DA in the form endorsed by Entity B. ● With respect to construction completion. It imposes an obligation on Entity A to complete the following, within a specified time after completion of the Contract: ● Construction of dwellings on the Land in accordance with the Development Applications endorsed by Entity B and obtain a Compliance Certificate. ● The ‘Services’ at Entity A’s expense. ● ‘Services’ are defined. ● With respect to Security. In particular: ● Entity A must provide Entity B a security (Security), for the performance of all of Entity A’s obligations under the PDA. ● If Entity A breaches its obligations, Entity B may remedy the breach and call on the Security payment for all costs incurred to remedy the breach. ● The Security will be released to Entity A following completion by Entity A of its obligations under the PDA. ● In addition to the Security, Entity A charges its interest in the Land as Security for the performance of its obligations. ● Entity B may register a charge or caveat over the Lease. ● The charge must be withdrawn once Entity A has complied with all obligations under the Contract and PDA. ● With respect to sale of the property. In particular, Entity A is prohibited from selling or assigning any interest in the Lease or Land to any person before the Release Date (ie the date when the Entity B releases the Security). ● Entity A indemnifies Entity B from any claim, expense, loss or damage suffered by Entity B arising out of a failure by Entity A to duly and punctually perform its obligations under the PDA Under the Lease: ● The Lease is for a term commencing on the date of completion of the Contract (Commencement Date). ● The lessee, being Entity A, shall, within a specified time from the Commencement Date, complete an ‘approved development’ on the Land. ● The permitted purpose for which the Land is to be used, including residential use and a prescribed non-residential use. ● The Lease requires Entity A to provide and thereafter maintain (where required) various works (collectively referred to hereafter as the Associated Works) ● Entity A must obtain written approval from the lessor prior to commencing any building or making structural improvements to the Land. The works that Entity A is contractually obligated to provide to Entity B under the Transaction Documents are collectively referred to as Development Services. Once the Compliance Certificate was received in respect of the development, Entity A applied for and was issued certificates of title for each unit.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) 1999 Section 9-5 | A New Tax System (Goods and Services Tax) 1999 Section 9-10 | A New Tax System (Goods and Services Tax) 1999 Section 9-15, and | A New Tax System (Goods and Services Tax) 1999 Division 82.

Reasons for decision: Summary: Entity A was granted a Lease over the Land for the purpose which includes residential use. Once the Compliance Certificate was received in respect of the development, Entity A applied for and received certificates of title for each unit. Section 9-5 provides that you make a taxable supply if: a) you make the supply 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 the indirect tax zone (Australia), and d) you are registered, or required to be registered, for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Under section 9-10 a supply is any form of supply whatsoever and includes amongst others, a supply of goods, a supply of services and an entry into an obligation to do anything. Pursuant to the Transaction Documents, Entity A will make a supply of Development Services to Entity B. The supply of Development Services is made in the course of Entity A’s enterprise, in Australia and Entity A is registered for GST. Further the supply of the development services will not be GST-free or input taxed. We must examine the nature of any consideration Entity A received for its supply of development services to Entity B. Section 9-15 provides that consideration includes any payment in connection with a supply of anything and any payment in response to or for the inducement of a supply of anything. Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration explains how the GST Act applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, if it is non-monetary consideration). Paragraph 12 of GSTR 2001/6 provides 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). Paragraph 47 of GSTR 2001/6 provides that in order for a supply to be 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. Paragraph 48 provides that the same analysis applies in determining whether a good, service or thing is non-monetary consideration for a supply. Goods and Services Tax Ruling GSTR 2015/2 Goods and services tax: development lease arrangements with government agencies considers the respective supplies between the developer and a government agency under development lease/licence arrangements. While you have not entered into a licence with the 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. Paragraphs 33 to 37 of GSTR 2015/2 discuss the circumstances where a supply of development services by the developer is in turn consideration for the supply of the land by the government agency. In summary: ● 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. ● 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. ● 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. Further, paragraphs 56 to 60 of GSTR 2015/2 discuss the GST position where works undertaken on the land are not transferred to, or retained by, the developer. In summary: ● The developer makes a supply of development services to the government agency when the developer completes additional works on land that is retained by the government agency, in accordance with the terms of a development lease arrangement. ● The supply of the land by the government agency is consideration for this supply of development services, by the developer, if: ● the terms of the development lease arrangement make the government agency's supply of land subject to or conditional on the developer completing the additional works, and ● Division 82 does not apply. The Transaction Documents support that there is a strong nexus between the Development Services supplied by Entity A and the supply of the Land. The Lease was granted to Entity A for a specified purpose including the construction of residential dwellings. The Lease also outlines associated works which must be completed and maintained. Under the Contract, Entity A agreed to Entity B retaining and using (if required) the ‘Security’ payable by Entity A to Entity B, for the performance by Entity A of its obligations under the Contract and the PDA. The Security would be released upon completion by Entity A of its obligations under the PDA. In addition to the Security, Entity A charges its interest in the Land as Security for the performance of its obligations under the Contract and PDA. Entity A was prohibited from selling or assigning any interest in the Lease or Land to any person before the Release Date. Once the Compliance Certificate was received in respect of the development, Entity A applied to Entity B for the title. Based on the analysis above, the supply of the Land to Entity A is consideration for Entity A’s supply of Development Services. Division 82 is also not applicable in this case. Consequently, Entity A makes a taxable supply of Development Services to Entity B in relation to the development of the Land. Subsection 9-15(1) provides that consideration includes: (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. GSTR 2001/6 explains how the GST Act applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, if it is non-monetary consideration). It is noted in paragraph 15 of GSTR 2001/6 that many transactions involve parties entering into multiple obligations and the question arises as to whether those obligations are consideration (or additional consideration) for a taxable supply. In this case the obligations between Entity A and Entity B are set out in the Transaction Documents which include a number of mechanisms to ensure that Entity A satisfactorily completes certain development works within the agreed timeframe for the Land. Paragraph 47 of GSTR 2001/6 provides that in order for a supply to be 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. Paragraph 48 provides that the same analysis applies in determining whether a good, service or thing is non-monetary consideration for a supply. Paragraph 70 of GSTR 2001/6 refers to the high court decision in Berry v. FC of T (1953) 89 CLR 653 and the meaning given to the term ‘in connection with’, in particular, 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'. It is further stated in paragraph 81 of GSTR 2001/6 that: 81. For a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. That is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire. … In question one, we have referenced paragraphs 33 to 37 and 56 to 60 of GSTR 2015/2 which discuss supplies of development services in exchange for interests in real property and where works undertaken on the land are not transferred to, or retained by, the developer. In this case, there is a direct link between both the monetary and non-monetary consideration provided by Entity A and the supply of the Land. The monetary payment and the Development Services have a substantial relationship, in a practical business sense to the property. The Development Services also have economic value and independent identity. This view is supported by the Transaction Documents which underpin the arrangement. Pursuant to the Lease, Entity A was obligated to complete an ‘approved development’. Entity A was also to provide and thereafter maintain (where required) the various associated works. If the approved development or associated works are not completed within the period specified, Entity B may terminate the Lease. Pursuant to the Contract, Entity A agreed to Entity B retaining and using (if required) ‘Security’ payable by Entity A for the performance by Entity A of its obligations under the Contract and the PDA. Entity A also acknowledged and consented to Entity B registering a charge or caveat over the Lease. Pursuant to the PDA entered concurrently with the Contract, Entity A must design and construct all buildings on the Land, consistent with the Development Guidelines (annexed to the PDA) and the terms and conditions contained in the PDA. Entity A must also consult with Entity B and seek endorsement from Entity B for the Initial Development Application. It was only after Entity A met its obligations under the Transaction Documents that it could obtain the certificates of title for each unit. Consequently, there is a sufficient nexus between the Development Services provided by Entity A to Entity B and the supply of the Land to Entity A. Accordingly, Entity A’s supply of development services is additional non-monetary consideration for the Entity B’s supply of the Land. This ruling does not address the value of the non-monetary consideration as it will depend on the factual matrix of the whole arrangement.

Reasons for decision: In this reasoning, please note: | ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | ● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au | ● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act