Private ruling: GST and the amalgamation of land
Date of advice: 14 August 2015
Published: August 2015

Ruling: Q1: Is the supply of vacant land, which is to be amalgamated with land under an existing lease in perpetuity, a taxable supply of land under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes | Q2: Would the associated perpetual lease changes constitute a change to the existing perpetual lease agreement such that it becomes a new Agreement for the purposes of the GST Act and therefore the lease fees would be subject to GST? | A2: No. Please see explanation below

Relevant facts and circumstances: Background Perpetual leases are granted for vacant land that is up to X hectares in area and is for residency purposes. A requirement of the lease is that a residence must be built on the land within xx months of the lease being granted and the lessee must then reside on the land. These residential leases are granted in perpetuity; there is no expiry date, and the lease can be bequeathed to someone in a will. Historically there has been no fee for the grant of the lease, only an annual rental fee. However, currently there is a fee for entering the lease equivalent to the value of the land and an annual rental. Land, which is subject to perpetual lease, has generally been partially cleared as it was previously used for stock grazing and is considered to be improved. The current rent is set at $XX plus $0.XXX per square metre of land comprised in the lease. There have been no changes to the perpetual lease agreements. The only change is to the rent paid. Current transaction In XXYY, A and B, the holders of perpetual lease formally applied to the Board for approval to adjust the boundaries of Lot X to address long standing encroachments of the existing development on the adjoining land (Portion Y and Portion Z). Site Description The proposed boundary adjustment involves three portions of land listed below: • Lot X (identified as Portion U and W) [the original land] • Portion Y [the additional land] • Portion Z [the additional land] The land is described as follows: Lot X Lot X is an irregular shaped block , XXsqm in size. The lot is occupied by a commercial building which includes a main building with reception, shop and restaurant and tourist accommodation and staff accommodation units and associated buildings. Portion Y Portion Y is a large rural site. The majority of the site is zoned Rural except for the land subject to this boundary adjustment. This part of the land is occupied by a number of water tanks of various sizes, a couple of sheds, fencing and a clothes line. Portion Z Portion Z is vacant land. Proposed Development The proposal seeks consent for the boundary adjustment of land on Lot X, Portion Y and Portion Z. A total of XXsqm of land on Portion Z and XXX sqm of land on Portion Y will be transferred to Lot X. The boundary adjustment will result in Lot X being increased to XXXsqm in area. A new Lot is to be created and known as Lot X1. You have advised that vacant, improved Land will be consolidated into the existing lease in perpetuity (issued prior to 1 July 2000). The consolidation will be pursuant to a Notation to the perpetual lease which will result in the boundary adjustment and a new Lot number (Lot X1). There is no cancellation of the existing lease and no new lease is created. The existing perpetual lease contains a residence. In an e-mail dated XXYY, you provided the following additional information: Question You have advised that a new lot will be created on amalgamation of the two lots of land. Will the titles of the lots prior to amalgamation be cancelled? Could you please elaborate on the administrative process which will be undertaken to achieve the amalgamation of the two lots of land. Answer A Development Application is required to be lodged and then approved for the boundary adjustment / subdivision of land. A notice of determination will be issued outlining the conditions of consent. The applicant will be required to lodge a subdivision certificate with plans suitable for registration. Upon registration by you a Lot and Deposited Plan number will be issued. Question Why is a notation made to the existing lease rather than cancelling the existing lease and issuing a new lease for the new lot created under the amalgamation? Answer The lease will need to be amended to reflect the change in boundary in accordance with the relevant Act. A notation is made on the lease to show the new boundary and date of approval.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5. | A New Tax System (Goods and Services Tax) Act 1999 Section 40-70. | A New Tax System (Goods and Services Tax) Act 1999 Section 38-445. | A New Tax System (Goods and Services Tax Transition) Act 1999 Subsection 6(3). | A New Tax System (Goods and Services Tax Transition) Act 1999 Subsection 7(1). | A New Tax System (Goods and Services Tax Transition) Act 1999 Section 11. | A New Tax System (Goods and Services Tax Transition) Act 1999 Section 12. | A New Tax System (Goods and Services Tax Transition) Act 1999 Section 13.

Reasons for decision: Summary: Is the supply of vacant land which is to be amalgamated with land under an existing lease in perpetuity, a taxable supply of land under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Pursuant to section 9-40, you must pay the GST payable on any taxable supply that you make. Section 9-5 of the GST Act states: 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. Under the current proposal, there will be a boundary adjustment of land on Lot X, Portion Y and Portion Z. A total of XXsqm of land on Portion Z [additional land] and XXXsqm of land on Portion Y [additional land] will be transferred to Lot X [original land].The boundary adjustment will result in Lot X being increased to XXsqm in area. The vacant, improved land [additional land] will be amalgamated with land [the original land] which is subject to a perpetual lease. The amalgamated land will result in the new Lot X1 which will be held under the original perpetual lease entered into between you and the lessee. The additional land, to be added to land held under the existing perpetual lease, will be effected by means of a notation to the existing perpetual lease. The interest in the additional land, which will be amalgamated with the original land held under a perpetual lease, is a separate supply of real property to the lessee by you when the lease over the vacant land is granted and the notation is made to the existing perpetual lease. | Detailed Reasoning - Consideration: The consideration for the grant of the lease of the additional land is: 1. the fee for entering the lease equivalent to the value of the land; and 2. the annual rental payments based on the size of the additional land ($0.XXX per square metre) [the variable component]. With regards to the perpetual lease over the original land, the change in area covered by the lease does not stop the lease from being a perpetual lease. The terms and conditions governing the lease remain the same. Therefore, both before and after the change in area, the perpetual lease is a long term lease as it is expected that it will continue for at least 50 years. The supply of the long term lease over the original land continues to be GST-free because of section 7 of the GST Transition Act. The consideration for that supply includes the proportion of the variable component of the rental payments which is attributable to the original land covered by the lease prior to amalgamation. Therefore, there is no GST payable on that proportion of the variable component of the rental payments even after the amalgamation. The increase in the variable component of the rental payment, arising from the additional land amalgamated with the original land, is not consideration for the original supply of the long-term lease. It is for the supply that arises because of the addition of the land to the Lot. It is therefore consideration for a taxable supply. There is no protection under the GST Transition Act for that component of the payment. It is noted that, while there a connection between the payment of the base amount of rent (currently $XXX) and the GST-free supply of the original perpetual lease, as well as the taxable amalgamation supply, the $XXX is not consideration for the taxable amalgamation supply. This is because, although there is a connection between the $XXX base rent and the taxable amalgamation supply, it is not for the taxable amalgamation supply. In AP Group Ltd v Commissioner of Taxation [2013] FCAFC 105 , Edmonds and Jaggot JJ stated at [32] - [33] that: …Section 9-5(a) specifies as a condition of a taxable supply the requirement that "you make the supply for consideration". The definitions of "supply" and "consideration", even if read literally as part of that requirement, do not result in the omission of the word "for". … The consideration must be "in connection with" the supply but the supply must also be "for" the consideration. "For", in this context, means "in order to obtain" (Macquarie Dictionary Online, item 3, Oxford Dictionary Online, item 9(a)) (emphasis added). The word "for" thus functions in the statutory description to identify the character of the connection which is required. It ensures that not every connection between the giving of consideration and the provision satisfy the first condition of making a taxable supply. If it were otherwise, any form of connection of any character between the making of a supply and the payment of consideration would suffice. As the base rent must be paid regardless of the size of the land, it is the GST-free supply of the original perpetual lease that gave rise to this payment. Consequently, the GST status of the base rent is not affected by the separate supply of the additional land. The only consideration for the taxable amalgamation supply is the increase in rent owing to the increase in area under the lease. | Detailed Reasoning - Conclusion: You will be making a separate supply of vacant, improved land [additional land] in Australia for consideration. The supply will be made in the course of your enterprise and you are registered for GST. Therefore, the supply of the additional land to the holder of a perpetual lease will be a taxable supply pursuant to section 9-5 to the extent that the supply is not GST-free or input taxed. In your case, the supply is of vacant, improved land and is not an input taxed or GST-free supply.

Reasons for decision: In this reasoning, unless otherwise stated, | • 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 | • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act