Private ruling: GST and the supply of services
Date of advice: 7 April 2016
Published: June 2016

Ruling: Q1: Is the acquisition of Development Services by B from A under a Development Agreement prior to the appointment of Receivers to B (the B Receivers) within the B Receivers' scope of responsibility or authority for managing B's affairs? | A1: No | Q2: Are the B Receivers or B (the incapacitated entity) entitled to input tax credits (ITCs) for the Development Services acquired by B under the Development Agreement prior to the appointment of the B Receivers? | A2: No. B (the incapacitated entity) is entitled to the ITCs for creditable acquisitions of the Development Services it acquired from A prior to the appointment of the B Receivers.

Relevant facts and circumstances: B is the registered proprietor of land on which a residential and commercial property development (the Development) occurred. A is a property development company which entered the Development Agreement with B to design, plan, and construct the Development. The B Receivers were appointed to B approximately one year after A finalised construction of the Development. B accounts on a non-cash basis, whereas the B Receivers account on a cash basis. Receivers and managers (A Receivers) were appointed to A approximately one year after it finalised construction of the Development. A accounts on a non cash basis, whereas the A Receivers account on a cash basis. Development Agreement B entered into the Development Agreement, in which B is described as the Owner and A as the Developer. The Development Agreement is in respect of the Project, which is defined as the: (a) Planning and design of the Works (b) Construction of the Works and (c) Marketing and sale of the Lots. The Development Agreement provides for the Developer to undertake the Works and provides the Developer with various powers in relation to the marketing and sale of the Lots. The Development Agreement sets out the allocation of the Project Proceeds, including the amount payable by B to A in consideration of the performance of A of its obligations under the Development Agreement. By an Amendment Agreement A and B agreed that: Pending sale of Lots the owner may lease Lots on terms and conditions approved by the Developer and shall pay to the Developer as part of its fee under this Agreement the rent received in respect of any such lease after meeting any costs associated with such lease and any commission payable in respect of the rent received. Although the Development Agreement provides for A to provide a range of services, the primary services to be provided are the: (a) Planning and design of the Works (b) Construction of the Works and (c) Marketing and sale of Lots. The planning, design and construction of the Works (the Development Services) were completed prior to the appointment of the Receivers of both B and A. Construction of the Works was completed and the Final Inspection Certificate was issued almost a year before the appointment of the Receivers of both B and A. Although some minor construction works remained, A does not intend to complete those works. While A was given certain powers under the Development Agreement to market and sell the Lots, it has not undertaken any marketing and selling services since the appointment of the A Receivers. Instead, B has acquired all services with respect to the marketing and sale of Lots directly from third parties and incurs all costs in relation to those services. A has not made supplies of those services since the appointment of the A Receivers. Following the appointment of the B Receivers, Project Proceeds have been received from the following two sources: (a) proceeds from the sale of Lots by B, inclusive of any adjustments on settlement and (b) rent received by B for the lease of a number of residential and commercial Lots in the development pending sale. The Development Agreement provides for the GST exclusive Project proceeds to be banked into a bank account in A's name and administered by A. However, in practice the B Receivers have directed the buyer of a Lot that settles post-appointment to issue various bank cheques in respect of the Project Proceeds to make various payments on behalf of A. The post-appointment Project Proceeds from the lease of residential Lots by B have been banked by the B Receivers for and on behalf of B into a bank account in A's name and administered by the A Receivers. The post-appointment Project Proceeds from the lease of commercial Lots by B have been paid to the B Receivers for and on behalf of B by the rental agent. Sale Proceeds In relation to the Project Proceeds from the sale of a Lot, the Development Agreement provides for B to retain an amount equal to the GST payable on the sale of the Lot and pay the balance of the Project Proceeds (the Development Fee) to A in consideration of the performance of its obligations under the Development Agreement. Project proceeds are defined to include (amongst other things) the total proceeds from the sale of a Lot, inclusive of any adjustments on settlement; and any rent paid by any person for the use or occupation of, or the right to use or occupy, any Lot. In accordance with the Development Agreement, the obligation to pay the Development Fee crystallises upon the completion of the sale of each lot. The Development Fee is payable to A from the Project Proceeds received by the B Receivers for and on behalf of B from the sale of Lots which settle post the appointment of the Receivers and Managers of both B and A. In accordance with the Development Agreement, at the end of each quarter A will issue an invoice to B for the Development Fee, being an amount equal to the Project Proceeds received by the B Receivers for and on behalf of B less GST on the sale of the Lot and other outstanding Project Costs. While B has a contractual obligation under the Development Agreement to pay the Development Fee to A upon sale of each Lot, the Receivers and Managers of both B and A have agreed that the sale funds will be remitted directly to pay for any Project Costs and then to the secured creditor to expedite repayment to the secured creditor as efficiently as possible. Any payments made by the B Receivers for and on behalf of B of the Project Costs and to the secured creditor are made on behalf of A. The following practical arrangements are in place in relation to the flow of funds from settlement of a sale of a Lot which occurs post the appointment of the Receivers and Managers of both B and A: (a) Upon settlement, the buyer is required to pay the balance to settle, being the total purchase price plus adjustments less the deposit already paid. The B Receivers direct the buyer to issue various bank cheques for the settlement balance amount to make the payments on behalf of B in relation to the following: a. the GST payable on the sale to B b. A distribution to the secured creditor (on behalf of A) c. Project Costs (on behalf of A); and d. Any remaining balance is paid to B. Acting for and on behalf of B, the B Receivers are required to pay the remaining sale proceeds (the Project Proceeds) to A as part of the Development Fee pursuant to the Development Agreement. (b) The deposit in relation to the Contract of Sale of Land is also distributed to pay Project Costs and to the Secured Creditor (on behalf of A). Rental Proceeds The rent proceeds received in relation to residential Lots leased by A prior to sale are received directly by A from the rental agent. A issues an invoice to B and retains the rent proceeds (less any costs associated with the lease and any commission payable in respect of the rent received) as part of the Development Fee pursuant to the Development Agreement. The rent proceeds in relation to the commercial Lots leased by B prior to sale are paid from the rental agent to B. B is required to pay the rental proceeds to A as part of the Development Fee pursuant to the Development Agreement (as amended).

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 11 | Section 11-5 | Section 58-10 | Paragraph 58-10(1)(b)

Reasons for decision: Summary: • 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 www.ato.gov.au Section 58-10 of the GST Act provides that: A representative of an incapacitated entity: • is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a taxable supply or a taxable importation • is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a creditable acquisition or creditable importation and • has any adjustment that the incapacitated entity would, but for this section or section 48-50, have; to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs. The statutory question posed by section 58-10 is whether or not the relevant supply or acquisition falls within the scope of representative's (Receivers and Managers) responsibility or authority for managing the incapacitated entity's (B's) affairs. You have advised that, although the Development Agreement provides for several services to be provided by A to B, its principal obligations were: • the planning and design of the Works; • the construction of the Works; and • the marketing and sale of the Lots. You have advised that all planning, design, and construction of the Works (collectively referred to as Development Services in this Ruling) were performed and completed by A prior to the appointment of the B Receivers, save for some minor work on common property which it will not perform. You have also advised that, although A was given certain powers under the Development Agreement to market and sell the Lots, it has not undertaken any such services since the appointment of the A Receivers and that B has taken on the role of marketing and selling the Lots. In the context of supplies of construction and building services, it is our view that the planning, design and construction of the works (the Development Services) performed in accordance with the Development Agreement were supplied and completed by A in the period prior to issuance of the Final Inspection Certificate, almost a year before the appointment of the Receivers and Managers of both B and A. We therefore consider that the Development Services were acquired by B prior to the appointment of the B Receivers. As the performance of the Development Services by A predated the appointment of the B Receivers, we consider the acquisitions (within the meaning of Division 11) of those services by B were not within the scope of the B Receivers' responsibility or authority for managing B's affairs for the purposes of section 58-10. Although the Development Agreement provided for B to acquire marketing and sales services in relation to the Lots from A, no such services were acquired from A post appointment of the B Receivers. Accordingly, B is entitled to any input tax credits (ITCs) under section 11-5 for any creditable acquisitions of those Development Services which are outside the scope of responsibility or authority of the B Receivers. Although the B Receivers authorised payment for some pre-appointment acquisitions of Development Services, this does not entitle them to ITCs under paragraph 58-10(1)(b) for those acquisitions relating to supplies made pre-appointment. The B Receivers are only entitled to ITCs for any creditable acquisitions made post appointment which are within the scope of their responsibility or authority for managing B's affairs. As you have advised the entirety of the Development Services were acquired by B from A pre-appointment, the B Receivers are not entitled to ITCs for any creditable acquisitions of those Development Services prior to their appointment.