Goods and Services Tax Determination GSTD 2007/2
Date of effect: 12 December 2007

What this ruling is about: This document was published prior to 1 July 2010 and was a public ruling for the purposes of former section 105-60 of Schedule 1 to the Taxation Administration Act 1953 . From 1 July 2010, this document is taken to be a public ruling under Division 358 of Schedule 1 to the Taxation Administration Act 1953 . A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. [ Note : This is a consolidated version of this document. Refer to the Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.] 1. The arrangement described in Taxpayer Alert TA 2007/1 may not result in supplies of accommodation being treated as GST-free because: Background and explanation 2. Taxpayer Alert TA 2007/1 (Alert) issued on 6 March 2007. It describes an arrangement designed to gain entitlement to input tax credits by treating otherwise input taxed supplies of residential accommodation as GST-free. These arrangements involve charitable institutions leasing land and buildings to associated endorsed charitable institutions in an attempt to increase the cost of making supplies of accommodation to residents and thereby satisfying the concession in section 38-250. The Alert indicates that the Commissioner is examining these arrangements. 3. The Alert applies to arrangements that exhibit some or all of the following features: 4. This determination explains the Commissioner's reasoning for considering that supplies made under arrangements with these features (as described in paragraph 3 of this Determination) may not be GST-free. Legislative context 5. Section 38-250 provides that, among other things, a supply of accommodation by an endorsed charitable institution, an endorsed trustee for a charitable fund, a gift-deductible entity or a government school is GST-free if: Cost to the supplier 6. When calculating the cost of providing something for the purposes of section 38-250 an organisation should include: 7. 'Incurred' in the context of calculating the cost of providing something for the purposes of section 38-250 is not defined in the GST Act and therefore takes its ordinary meaning. 8. Similarly in an income tax context there is no statutory definition, or an exhaustive judicial meaning, of the term 'incurred'. However some guidance is available from judicial decisions. [10] It is generally accepted that a loss or outgoing is incurred when the taxpayer concerned becomes 'definitively committed' to the expenditure. This will typically be when a present legal obligation to make the expenditure comes into existence, even though the liability may be defeasible by others or the amount of the liability cannot be precisely ascertained (provided it is capable of reasonable estimation). Whether a taxpayer has a presently existing liability which definitively commits the taxpayer to incur expenditure, depends on the facts and circumstances, including the legal arrangements under which the liability is claimed to arise. 9. No money need actually be outlaid for a cost to be 'incurred', so long as there is a presently existing liability. Cost to the supplier of providing the accommodation Where Entity B is a company and a separate legal entity 10. The supply of land and buildings by Entity A to Entity B may be made either by establishing an arrangement or utilising a pre-existing arrangement. Where Entity B is a company, judicial decisions provide guidance as to whether the acquisition of the land and buildings by way of lease by Entity B can be included in calculating the cost of making supplies by Entity B. 11. In Case S28 85 ATC 273; (1985) 28 CTBR(NS) 279, management fees were calculated and recorded in the associated companies' respective accounting records and no actual payments were made. 12. In finding that the expenditure had been incurred, the No. 3 Board of Review found the following: 13. As such, it is possible for a company that is a separate legal entity to have a presently existing liability and be 'definitively committed' to that liability when it records it as a book entry, even if no actual payment is made. 14. In this arrangement the payments from Entity B to Entity A for the supply of land and buildings by way of lease are recorded as book entries and no actual payments are made. 15. Where Entity B is a company, it will be considered to have incurred costs of acquiring the land and buildings by way of lease from Entity A if an objective analysis of the facts shows that it is definitively committed to those costs. This is because Entity B has a presently existing liability when it records the other party as a creditor in its books of account, even though no actual payments are made. Where Entity B is definitively committed to the costs, they can be included for the purpose of subparagraph 38-250(2)(b)(i), in the cost to Entity B of providing the accommodation. 16. Whether Entity B is definitively committed to the costs recorded in the accounts is a question of objectively analysing the available evidence to determine whether the parties intend Entity B to be subjected to the liability concerned. If, objectively, the parties never intend the liability to be met by Entity B, the Commissioner would not accept that the amount is a cost to Entity B. Relevant evidence would include, for example, whether Entity B has been invested with the means to meet the liability owed to Entity A. 17. If the consideration paid by the residents to Entity B is less than 75% of the cost, as described above, to the supplier (Entity B) of providing the accommodation, the supplies are GST-free and Entity B can claim input tax credits for the GST paid on acquisitions relating to the supplies. This will be the case unless, as discussed below, Division 165 applies. Where Entity B is a non-profit sub-entity 18. If Entity A is an endorsed charitable institution [11] it may make a choice to establish Entity B as a non-profit sub-entity under Division 63. A non-profit sub-entity is treated as a separate entity for GST purposes only, and is not a separate legal entity. In the context of these specific arrangements, doubt may exist as to the validity of the leasing arrangement, and if accepted further doubt may exist as to whether, unless evidenced by the actual transfer of monies, costs can be 'incurred' by the particular non-profit sub-entity under this arrangement. 19. As no actual payment is made in this specific arrangement, if Entity B does not have a presently existing pecuniary liability, the acquisition of the land and buildings by way of lease by Entity B may not be considered to be included in the cost to Entity B of providing the accommodation for the purpose of subparagraph 38-250(2)(b)(i). [12] Consequently, the consideration for the accommodation paid by residents may not be less than 75% of the cost to the supplier (Entity B) of providing the accommodation, and the supply may not be GST-free. 20. If the supply of accommodation by Entity B is not GST-free it will be input taxed, and Entity B will not be entitled to claim input tax credits on acquisitions to the extent that they relate to the supply. Division 165 - anti-avoidance 21. Alternatively, the Commissioner will consider the application of the general anti-avoidance provisions in Division 165 to both forms of the arrangements as described above. 22. The application of Division 165 was considered by the Administrative Appeals Tribunal in VCE v. Federal Commissioner of Taxation 2006 ATC 187; 63 ATR 1249, the first decision to examine the use of these provisions. Additionally, the Commissioner has set out his views on the application of Division 165 to specific arrangements and these are discussed in a number of public rulings and determinations. [13] 23. The application of Division 165, which contains the general anti-avoidance provisions, requires a careful weighing of the individual circumstances of each case. Therefore, in the absence of all relevant information, it is not possible to state definitively whether a particular scheme will attract the application of Division 165. 24. For the Division to apply, the following four elements need to be satisfied: Element 1: scheme 25. It is considered that all or only some of the elements comprising the arrangements described in paragraph 3 of this Determination would constitute a 'scheme' under the broad definition of that term in subsection 165-10(2): see the observations of the High Court in Federal Commissioner of Taxation v. Hart (2004) 217 CLR 216 at 234-238 and 260-261 in relation to the virtually identical definition of 'scheme' for the purposes of Part IVA of the Income Tax Assessment Act 1936 and the decision of Deputy President Forgie of the Administrative Appeals Tribunal in the VCE v. Federal Commissioner of Taxation 2006 ATC 187, 63 ATR 1249 that specifically dealt with a scheme in the context of the application of Division 165. 26. The scheme in the arrangements may be concisely described as one involving the interposition of Entity B between Entity A and its supplies of residential accommodation to residents, effected by way of the lease of the land and buildings to Entity B. Element 2: GST benefit 27. Further, it is considered that the arrangement constitutes a scheme which would give rise to a GST benefit under paragraph 165-10(1)(b). That is, had Entity A not entered into the lease of the land and buildings with Entity B, it would have continued, as before, to make input taxed supplies of residential accommodation directly to residents. Entity B would not have made GST-free supplies of residential accommodation and claimed input tax credits in respect of these supplies. Therefore, because of its entitlement to input tax credits arising from the GST-free supplies of residential accommodation, it could reasonably be expected that a larger amount would be payable to Entity B under the provisions of the GST Act (apart from Division 165) than would have been but for the scheme: see the comments of the High Court in Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 385 on the reasonable expectation test in the context of the definition of 'tax benefit' for the purposes of Part IVA of the Income Tax Assessment Act 1936. Element 3: entity gets GST benefit 28. Entity B gets the GST benefit of the input tax credits described in paragraph 27 of this Determination. Element 4: dominant purpose or principal effect 29. It would also be reasonable to conclude, having regard to the matters set out in subsection 165-15(1), that the sole or dominant purpose of the scheme or part of the scheme, or the principal effect of the scheme or part of the scheme, was for Entity B to obtain the GST benefit. In this context the following general observations can be made: 30. It is therefore open to the Commissioner to exercise his powers under section 165-40 to negate the GST benefit by denying Entity B the input tax credits on its acquisitions in respect of the accommodation. Date of Effect 31. This Determination applies [to tax periods commencing] both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). 32. [Omitted.] Commissioner of Taxation 12 December 2007

Class of entities or scheme: 25. It is considered that all or only some of the elements comprising the arrangements described in paragraph 3 of this Determination would constitute a 'scheme' under the broad definition of that term in subsection 165-10(2): see the observations of the High Court in Federal Commissioner of Taxation v. Hart (2004) 217 CLR 216 at 234-238 and 260-261 in relation to the virtually identical definition of 'scheme' for the purposes of Part IVA of the Income Tax Assessment Act 1936 and the decision of Deputy President Forgie of the Administrative Appeals Tribunal in the VCE v. Federal Commissioner of Taxation 2006 ATC 187, 63 ATR 1249 that specifically dealt with a scheme in the context of the application of Division 165. 26. The scheme in the arrangements may be concisely described as one involving the interposition of Entity B between Entity A and its supplies of residential accommodation to residents, effected by way of the lease of the land and buildings to Entity B. | Element 2: GST benefit: 27. Further, it is considered that the arrangement constitutes a scheme which would give rise to a GST benefit under paragraph 165-10(1)(b). That is, had Entity A not entered into the lease of the land and buildings with Entity B, it would have continued, as before, to make input taxed supplies of residential accommodation directly to residents. Entity B would not have made GST-free supplies of residential accommodation and claimed input tax credits in respect of these supplies. Therefore, because of its entitlement to input tax credits arising from the GST-free supplies of residential accommodation, it could reasonably be expected that a larger amount would be payable to Entity B under the provisions of the GST Act (apart from Division 165) than would have been but for the scheme: see the comments of the High Court in Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 385 on the reasonable expectation test in the context of the definition of 'tax benefit' for the purposes of Part IVA of the Income Tax Assessment Act 1936. | Element 3: entity gets GST benefit: 28. Entity B gets the GST benefit of the input tax credits described in paragraph 27 of this Determination. | Element 4: dominant purpose or principal effect: 29. It would also be reasonable to conclude, having regard to the matters set out in subsection 165-15(1), that the sole or dominant purpose of the scheme or part of the scheme, or the principal effect of the scheme or part of the scheme, was for Entity B to obtain the GST benefit. In this context the following general observations can be made: 30. It is therefore open to the Commissioner to exercise his powers under section 165-40 to negate the GST benefit by denying Entity B the input tax credits on its acquisitions in respect of the accommodation.



Appendix: 2. Taxpayer Alert TA 2007/1 (Alert) issued on 6 March 2007. It describes an arrangement designed to gain entitlement to input tax credits by treating otherwise input taxed supplies of residential accommodation as GST-free. These arrangements involve charitable institutions leasing land and buildings to associated endorsed charitable institutions in an attempt to increase the cost of making supplies of accommodation to residents and thereby satisfying the concession in section 38-250. The Alert indicates that the Commissioner is examining these arrangements. 3. The Alert applies to arrangements that exhibit some or all of the following features: 4. This determination explains the Commissioner's reasoning for considering that supplies made under arrangements with these features (as described in paragraph 3 of this Determination) may not be GST-free. | Legislative context: 5. Section 38-250 provides that, among other things, a supply of accommodation by an endorsed charitable institution, an endorsed trustee for a charitable fund, a gift-deductible entity or a government school is GST-free if: | Cost to the supplier: 6. When calculating the cost of providing something for the purposes of section 38-250 an organisation should include: 7. 'Incurred' in the context of calculating the cost of providing something for the purposes of section 38-250 is not defined in the GST Act and therefore takes its ordinary meaning. 8. Similarly in an income tax context there is no statutory definition, or an exhaustive judicial meaning, of the term 'incurred'. However some guidance is available from judicial decisions. [10] It is generally accepted that a loss or outgoing is incurred when the taxpayer concerned becomes 'definitively committed' to the expenditure. This will typically be when a present legal obligation to make the expenditure comes into existence, even though the liability may be defeasible by others or the amount of the liability cannot be precisely ascertained (provided it is capable of reasonable estimation). Whether a taxpayer has a presently existing liability which definitively commits the taxpayer to incur expenditure, depends on the facts and circumstances, including the legal arrangements under which the liability is claimed to arise. 9. No money need actually be outlaid for a cost to be 'incurred', so long as there is a presently existing liability. | Where Entity B is a company and a separate legal entity: 10. The supply of land and buildings by Entity A to Entity B may be made either by establishing an arrangement or utilising a pre-existing arrangement. Where Entity B is a company, judicial decisions provide guidance as to whether the acquisition of the land and buildings by way of lease by Entity B can be included in calculating the cost of making supplies by Entity B. 11. In Case S28 85 ATC 273; (1985) 28 CTBR(NS) 279, management fees were calculated and recorded in the associated companies' respective accounting records and no actual payments were made. 12. In finding that the expenditure had been incurred, the No. 3 Board of Review found the following: 13. As such, it is possible for a company that is a separate legal entity to have a presently existing liability and be 'definitively committed' to that liability when it records it as a book entry, even if no actual payment is made. 14. In this arrangement the payments from Entity B to Entity A for the supply of land and buildings by way of lease are recorded as book entries and no actual payments are made. 15. Where Entity B is a company, it will be considered to have incurred costs of acquiring the land and buildings by way of lease from Entity A if an objective analysis of the facts shows that it is definitively committed to those costs. This is because Entity B has a presently existing liability when it records the other party as a creditor in its books of account, even though no actual payments are made. Where Entity B is definitively committed to the costs, they can be included for the purpose of subparagraph 38-250(2)(b)(i), in the cost to Entity B of providing the accommodation. 16. Whether Entity B is definitively committed to the costs recorded in the accounts is a question of objectively analysing the available evidence to determine whether the parties intend Entity B to be subjected to the liability concerned. If, objectively, the parties never intend the liability to be met by Entity B, the Commissioner would not accept that the amount is a cost to Entity B. Relevant evidence would include, for example, whether Entity B has been invested with the means to meet the liability owed to Entity A. 17. If the consideration paid by the residents to Entity B is less than 75% of the cost, as described above, to the supplier (Entity B) of providing the accommodation, the supplies are GST-free and Entity B can claim input tax credits for the GST paid on acquisitions relating to the supplies. This will be the case unless, as discussed below, Division 165 applies. | Where Entity B is a non-profit sub-entity: 18. If Entity A is an endorsed charitable institution [11] it may make a choice to establish Entity B as a non-profit sub-entity under Division 63. A non-profit sub-entity is treated as a separate entity for GST purposes only, and is not a separate legal entity. In the context of these specific arrangements, doubt may exist as to the validity of the leasing arrangement, and if accepted further doubt may exist as to whether, unless evidenced by the actual transfer of monies, costs can be 'incurred' by the particular non-profit sub-entity under this arrangement. 19. As no actual payment is made in this specific arrangement, if Entity B does not have a presently existing pecuniary liability, the acquisition of the land and buildings by way of lease by Entity B may not be considered to be included in the cost to Entity B of providing the accommodation for the purpose of subparagraph 38-250(2)(b)(i). [12] Consequently, the consideration for the accommodation paid by residents may not be less than 75% of the cost to the supplier (Entity B) of providing the accommodation, and the supply may not be GST-free. 20. If the supply of accommodation by Entity B is not GST-free it will be input taxed, and Entity B will not be entitled to claim input tax credits on acquisitions to the extent that they relate to the supply. | Division 165 - anti-avoidance: 21. Alternatively, the Commissioner will consider the application of the general anti-avoidance provisions in Division 165 to both forms of the arrangements as described above. 22. The application of Division 165 was considered by the Administrative Appeals Tribunal in VCE v. Federal Commissioner of Taxation 2006 ATC 187; 63 ATR 1249, the first decision to examine the use of these provisions. Additionally, the Commissioner has set out his views on the application of Division 165 to specific arrangements and these are discussed in a number of public rulings and determinations. [13] 23. The application of Division 165, which contains the general anti-avoidance provisions, requires a careful weighing of the individual circumstances of each case. Therefore, in the absence of all relevant information, it is not possible to state definitively whether a particular scheme will attract the application of Division 165. 24. For the Division to apply, the following four elements need to be satisfied: | Element 1: scheme: 25. It is considered that all or only some of the elements comprising the arrangements described in paragraph 3 of this Determination would constitute a 'scheme' under the broad definition of that term in subsection 165-10(2): see the observations of the High Court in Federal Commissioner of Taxation v. Hart (2004) 217 CLR 216 at 234-238 and 260-261 in relation to the virtually identical definition of 'scheme' for the purposes of Part IVA of the Income Tax Assessment Act 1936 and the decision of Deputy President Forgie of the Administrative Appeals Tribunal in the VCE v. Federal Commissioner of Taxation 2006 ATC 187, 63 ATR 1249 that specifically dealt with a scheme in the context of the application of Division 165. 26. The scheme in the arrangements may be concisely described as one involving the interposition of Entity B between Entity A and its supplies of residential accommodation to residents, effected by way of the lease of the land and buildings to Entity B. | Element 2: GST benefit: 27. Further, it is considered that the arrangement constitutes a scheme which would give rise to a GST benefit under paragraph 165-10(1)(b). That is, had Entity A not entered into the lease of the land and buildings with Entity B, it would have continued, as before, to make input taxed supplies of residential accommodation directly to residents. Entity B would not have made GST-free supplies of residential accommodation and claimed input tax credits in respect of these supplies. Therefore, because of its entitlement to input tax credits arising from the GST-free supplies of residential accommodation, it could reasonably be expected that a larger amount would be payable to Entity B under the provisions of the GST Act (apart from Division 165) than would have been but for the scheme: see the comments of the High Court in Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 385 on the reasonable expectation test in the context of the definition of 'tax benefit' for the purposes of Part IVA of the Income Tax Assessment Act 1936. | Element 3: entity gets GST benefit: 28. Entity B gets the GST benefit of the input tax credits described in paragraph 27 of this Determination. | Element 4: dominant purpose or principal effect: 29. It would also be reasonable to conclude, having regard to the matters set out in subsection 165-15(1), that the sole or dominant purpose of the scheme or part of the scheme, or the principal effect of the scheme or part of the scheme, was for Entity B to obtain the GST benefit. In this context the following general observations can be made: 30. It is therefore open to the Commissioner to exercise his powers under section 165-40 to negate the GST benefit by denying Entity B the input tax credits on its acquisitions in respect of the accommodation. | Date of Effect: 31. This Determination applies [to tax periods commencing] both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). 32. [Omitted.] Commissioner of Taxation 12 December 2007 Previous draft: GSTD 2007/D3


There certainly was no payment but that lack is of no real significance. Where a separate legal entity accepts a liability by recording it in its books of account, and shows the other party as a creditor, it seems to me it has to be regarded as 'definitively committed' and the expenditure is incurred in the sense required by sec 51(1). (Federal Commissioner of Taxation v. James Flood Pty Ltd (1953) 88 CLR 492 at p 506.)


Related rulings: TR 97/7 TR 2006/10 GSTR 2004/3 GSTR 2005/3 GSTR 2005/4 GSTR 2005/5 GSTR 2006/4 GSTD 2006/5 GSTD 2004/4 GSTR 2008/1
Legislative references: ITAA 1936 Pt IVA ANTS(GST)A 1999 ANTS(GST)A 1999 38-250 ANTS(GST)A 1999 38-250(1)(b)(i) ANTS(GST)A 1999 38-250(2)(b)(i) ANTS(GST)A 1999 40-35 ANTS(GST)A 1999 Div 63 ANTS(GST)A 1999 63-5(3) ANTS(GST)A 1999 Div 165 ANTS(GST)A 1999 165-10(1) ANTS(GST)A 1999 165-10(1)(b) ANTS(GST)A 1999 165-10(2) ANTS(GST)A 1999 165-15 ANTS(GST)A 1999 165-15(1) ANTS(GST)A 1999 165-40 ANTS(GST)A 1999 176-1(1) ANTS(GST)A 1999 195-1 TAA 1953 Sch 1 Div 358
Case references: Case S28 85 ATC 273 (1985) 28 CTBR(NS) 279
Subject references: Division 165 endorsed charitable institution GST benefit GST-free supply input taxed supply residential accommodation scheme
Other references: Taxpayer Alert TA 2004/2 Taxpayer Alert TA 2004/6 Taxpayer Alert TA 2004/7 Taxpayer Alert TA 2004/8 Taxpayer Alert TA 2004/9 Taxpayer Alert TA 2005/4 Taxpayer Alert TA 2007/1 Charities Consultative Committee Resolved Issues Document, Non-Commercial Activities of Charities