Private ruling: GST and Property Development Agreement
Published: October 2012

Ruling: Q1: Can the Commissioner of Taxation (Commissioner) confirm that the Payments received by the Owner from the Developer under the Development Agreement are not consideration for any taxable supply? | A1: The Commissioner confirms that the Payments received by the Owner from the Developer under the Development Agreement are not consideration for any taxable supply by the Owner to the Developer.


Relevant legislative provisions: Section 9-5 of the GST Act | Section 9-10 of the GST Act | Section 9-15 of the GST Act

Reasons for decision: Detailed Reasoning - Question 1:: It is submitted by the Owner that the Payments received by the Owner are not consideration for any supply by the Owner under the Development Agreement. In the alternative, the Owner submits that the Payments are consideration for an input taxed financial supply in the nature of performance bonds. In this case we agree with the submission that the Payments received by the Owner are not consideration for any supply by the Owner under the Development Agreement. Our reasons are set out as follows. GST is payable on taxable supplies. Section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act) states that: | Detailed Reasoning - You make a taxable supply if:: · you make the supply for consideration; and · the supply is made in the course or furtherance of an enterprise that you carry on; and · the supply is connected with Australia; and · 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. Goods and Services Tax Ruling GSTR 2001/6 , Goods and services tax: non-monetary consideration (GSTR 2001/6) states at paragraph 47: 47. 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. Accordingly, in order for the first requirement for a taxable supply to be satisfied, there must be a 'supply for consideration'. For there to be a supply for consideration, the following three fundamental criteria must be met: · there must be a supply; · there must be a payment; and · there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration. Section 9-15 of the GST Act provides the meaning of the term consideration and states: | Detailed Reasoning - (1) Consideration 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. In this case there is clearly Payments that flow from the Developer to the Owner. Therefore what remains to be determined is whether these Payments have the relevant nexus to an identified supply by the Owner. The meaning of 'supply' is provided in section 9-10 of the GST Act and subsection 9-10(1) of the GST Act states that, 'A supply is any form of supply whatsoever'. | Detailed Reasoning - Subsection 9-10(2) of the GST Act contains a list of things that are considered as supplies which includes (amongst other things):: · a creation, grant, transfer, assignment or surrender of any right; and · an entry into, or release from, an obligation to do anything or to refrain from an act or to tolerate an act or situation. Goods and Services Tax Ruling GSTR 2006/9, Goods and services tax: supplies (GSTR 2006/9), provides guidance on the meaning of 'supply' in the GST Act. Paragraph 71 of GSTR 2006/9 explains that the term 'supply' has been held to take its ordinary meaning which is to 'furnish or to serve' or to 'furnish or provide'. In adopting the ordinary meaning, it follows that the supplier must take some action or do something to make a supply. | Detailed Reasoning - Further GSTR 2006/9 at paragraph 137 states the following:: 137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply. Under the terms of the Development Agreement the Developer will perform the Works and undertake the Development of the Land for consideration (being a share of the sale proceeds from the Development). Further as part of the development of the Land there are a number of terms and conditions that must be performed by the respective parties. This includes terms which require the Payments to be made to the Owner by the Developer. These Payments are subsequently offset against the Owner's entitlement to receive proceeds in accordance with the terms of the Development Agreement. 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. | Detailed Reasoning - Further, in Saga Holdings Ltd v Commissioner of Taxation 2006 ATC 4001 the Court held:: ' a technical analysis of one part of a transaction or of one set of obligations within a contract, even though accurate in legal principle, which is capable of explaining the service supplied, or the consideration given, in a restricted way, is not necessarily the right answer in law to the application of the provisions of this statute… this approach does indicate that taxable transactions should not be artificially dissected so as to demonstrate as being the service provided… Consistent with the above, we are of the view that while the terms of the Development Agreement give rise to specific things being done and the creation of specific rights and obligations for the Owner, these are merely terms and conditions that go to the execution of the Development Agreement as a whole. On this basis, the rights and obligations are part of the broader transaction and are not the substance of the transaction and hence not the subject matter of a supply. As a consequence, the Payments received by the Owner from the Developer do not have a sufficient nexus with any supply made by the Owner and therefore will not satisfy paragraph 9-5(a) of the GST Act. Rather, the essence of the transaction is the Owners entry into an arrangement to acquire services (the Works) from the Developer to develop the Land. This will allow for the subsequent sale of property by the Owner. It is the subsequent sale of the properties that will be the relevant supplies made by the Owner for which consideration will or may be received. Accordingly, as the Owner does not make supplies for which the Payments are consideration, the first requirement of a taxable supply as defined in section 9-5 of the GST Act is not satisfied. Therefore, GST is not payable on the Payments. | Detailed Reasoning - Additional information: We note that this ruling does not address the GST consequences of a payment received by the Owner where the revenue share has not been met and therefore is forfeited. Rather, the ruling only addresses the GST consequences of the Payments received by the Owner under the Development Agreement, which are later refunded by way of an offset against the proceeds of sale.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The Owner carries on an enterprise is Australia and is registered for GST. | The Owner has obtained planning approval to undertake a development of certain land (the Land). | The Owner and the Developer have entered into a Development Agreement. | The Development Agreement provides that the Developer will perform and undertake the Development of the Land (the Works) in return for a share of the sale proceeds from the Development. | Upon entering into the Development Agreement, the Owner appoints the Developer and the Developer accepts the appointment to perform the Works and undertake the Development on the terms and condition set out from the date of the agreement. | The Owner and the Developer intend that the Development of the Land will be developed in a number of precincts, with each precinct made up of a number of stages. | To secure the Developer's performance of its obligations under the Development Agreement the Developer is required to make Payments to the Owner. | Each Payment is defined as a 'performance and security bond'. The Payments will be released to the Owner and then refunded to the Developer if its obligations under the Development Agreement are satisfied (which is expected to occur). | In practice the Payments are not physically refunded to the Developer, but are instead set off against amounts required to be distributed by the Developer to the Owner (from proceeds of sale). | The Development Agreement provides that the proceeds of sale of the development (i.e. the proceeds from the sale of property by the Owner to a third party), will be paid into a nominated account and distributed in the manner set out in the terms and conditions which explain that: | · the first X Amount to the Owner, and that X Amount being offset and discharged by the Payments, | · an amount to the Owner representing the Owners GST liability on the supply of property under each contract of sale to third parties, | · the applicable revenue share percentage to the Owner, and | · the residue amount to the Developer | The Development Agreement provides that all residue amounts are consideration for the Developers for performance of their obligations under the agreement. | The Developer Agreement does not create or evidence a relationship between the parties of relationship, joint venture or principle and agent.