Private ruling: GST and Development leases
Date of advice: 27 February 2018
Published: June 2018

Ruling: Q1: Does Entity A make a supply of development services to the government agency in respect of the works it is required to undertake on the land as part of 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 (You) is registered for GST. Entity A has entered into an arrangement with a government agency (Entity B) for the purchase and development of land (the Land). The Land will contain predominantly residential premises and some commercial premises. The legal and commercial arrangement underpinning the development is: ● Prior to the sale to Entity A, Entity B was the owner of the Land. ● There have been no previous sales (GST-free or otherwise) of the Land. ● Each of the Blocks 1, 2, and 3 were purchased pursuant to the executed Contract of Sale. ● Entity A will initially enter into a development lease for Blocks 1 and 2 (the Initial Development Lease). ● Block 3 has a delayed settlement and, as such, it will not form part of the Initial Development Lease. ● The Deed provides a mechanism for the Initial Development Lease to be surrendered and a consolidated Development Lease incorporating Block 3 (the Consolidated Development Lease) to be granted immediately following settlement for Block 3. The Consolidated Development Lease will be on terms and conditions substantially similar to the Initial Development Lease. Under the Contract of Sale: ● Entity B will grant the Initial Development Lease to Entity A on completion in respect of Blocks 1 and 2 ● the Price is specified ● the Lease is specified as being granted to allow Entity A to undertake the development on the Land Under the draft Initial Development Lease: ● Entity A holds the land for the term for the specified purpose of subdivision and constructing the works and building in accordance with the Deed ● Entity A must apply for titles in the land after issue of the Certificate of Practical Completion in relation to the completion of construction of a stage of the works ● when Entity A has obtained a Certificate of Practical Completion in relation to completion of construction of a stage of the works, Entity A shall surrender the Initial Development Lease insofar as it relates to that stage and separate titles in the land are granted to Entity A. Under the Deed: ● Entity B and Entity A agree that an estate will be developed on the Land in the manner contemplated by the Deed and the Development Lease. ● Upon compliance with the requirements of the Deed, Entity B will grant, stage by stage to Entity A, titles in the land and the Development Lease will be progressively surrendered for that purpose. ● Entity A must, at its own costs and in accordance with the requirements within the Deed and Development Lease, undertake the design, construction and completion of the Works listed in the Deed. ● ‘Works’ is defined in the Deed. ● Building works are not included in the works required to be completed under the Deed and are therefore not subject to the issue of a Certificate of Practical Completion under the Deed.

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 9-10 | A New Tax System (Goods and Services Tax) Act 1999 Division 81 | A New Tax System (Goods and Services Tax) Act 1999 Division 82

Reasons for decision: Summary: 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. Goods and Services Tax Ruling GSTR 2015/2 Goods and services tax: development lease arrangements with government agencies explains the GST treatment of transactions in the context of development lease arrangements. It is accepted that the arrangement between you and Entity B is a development lease arrangement as described in GSTR 2015/2, in particular paragraphs 14 to 18. The documents underpinning the arrangement support that there is a strong nexus between the Development Services supplied by you and the supply of the Land by Entity B. Paragraphs 9 and 10 of GSTR of 2015/2 provide: 9. Where a government agency grants a development lease to allow a developer to undertake development works on the land, the government agency makes a supply of land to the developer by way of lease or licence. The developer also makes a corresponding acquisition of land by way of lease or licence. 10. In completing the development works on the land, in accordance with the terms of a development lease arrangement, the developer makes a supply of development services to the government agency. You will be granted a development lease over Blocks 1 and 1, Section 1 (the Initial Development Lease) for the purpose of subdivision and constructing the works and building in accordance with the Deed. Settlement for Block 3 will occur once payment of the consideration (instalments) has been received in full. Following this the Initial Development Lease will be surrendered and a consolidated Development Lease incorporating Block 3 (the Consolidated Development Lease) is to be granted on terms and conditions substantially similar to the Initial Development Lease. The Development Lease is granted to Entity A for the purposes of subdivision and constructing the works in accordance with the Deed. The Deed provides that upon compliance with the requirements of the Deed, Entity B will grant, stage by stage to Entity A, titles in the land and the Development Lease will be progressively surrendered for that purpose. The Deed requires Entity A in accordance with the Deed and Development Lease, to undertake the design, construction and completion of the Works. These Works are specified. In your circumstances, applying the relevant principles outlined in GSTR 2015/2 as referred to above, in granting the Initial Development Lease (development lease), and then the subsequent Consolidated Development Lease (development lease) and the titles in the land under the agreement, Entity B is making a supply of land to you, and you are making a corresponding acquisition of land. In completing the development works on the Land, pursuant to development lease and in accordance with the Deed, you make a supply of development services to Entity B. It is also clear that the building works are not included in the works required to be completed under the Deed and are not subject to the Certificate of Practical Completion. Therefore, the development services are the Works as outlined in the Deed and exclude any building works. It follows that you are making a supply of development services and will meet all the requirements of section 9-5, including, as discussed below, the requirement that you make the supply for consideration. Accordingly, you are making a taxable supply of development services to Entity B. This supply is attributable as outlined in GSTR 2015/2. The receipt of the Land by you from Entity B is non-monetary consideration for the development services you supply to Entity B if there is sufficient nexus between the supply of the development services and the supply of the Land. Paragraph 35 of GSTR 2015/2 provides: 35. 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. ... For example, the developer only becomes entitled to the freehold or long-term lease on completion of the development or a particular stage of the development. The development lease was granted for the purpose of undertaking the development. Upon your compliance with the requirements of the Deed, Entity B will grant to you, stage by stage, titles in the land and the development lease will be progressively surrendered for that purpose. Relevant separate titles will be granted to you by Entity B when you complete construction of a stage of the works, have obtained a Certificate of Practical Completion, and have surrendered the development lease insofar as it relates to that stage. You are required to apply for titles in the land after completion of construction of a stage of the works. Applying the relevant principles in paragraphs 34 and 35 of GSTR 2015/2 to the above facts, we consider that the supply of the land to you by Entity B is non-monetary consideration for your supply of the development services to Entity B and conversely, your supply of the development services to Entity B is in-turn non-monetary consideration for the supply of the land to you by the Entity B. We also note that the Contract of Sale provide for monetary payment to be made by you. Therefore the payment of this amount is also consideration for the supply of the Land by Entity B. On the facts submitted to us, the provision of your consideration for the supply of the land is not a payment that is an Australian tax, fee or charge as defined in section 195-1 and therefore Division 81 has no application. Furthermore, your supply of development services is made in return for a supply of land to you by Entity B (as opposed to a supply of a right to develop the land) and therefore Division 82 also has no application. 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