Introduction

Draft GST Ruling GSTR 2014/D5 ‘Goods and Services tax: development lease arrangements with government entities’ outlines the Commissioner’s views on the GST treatment of arrangements between government entities and private developers.

The draft ruling is quite comprehensive and addresses a number of issues arising out of development lease arrangements, whereby government agencies sell or grant long-term leases over land to developers subject to conditions governing developments to be undertaken on the land by the developer.

In general, the development lease arrangements have the following common features:

• the government agency initially grants a short-term lease or licence (the development lease) to allow the developer to enter the land and carry out of the works. The developer may be required to pay rent or a lump sum amount for the grant of the development lease;
• all risks relating to the development rest with the developer;
• the developer works on its own account and not as agent of the government entity
• the parties expect that the development works will be completed in accordance with the terms of the development lease arrangement;
• the government agency transfers the freehold or grants a long-term lease of the land to the developer when certain conditions are satisfied.

Identification supplies for consideration under development lease arrangements

The ruling considers that the terms of agreements entered into by the parties are primary to identifying the supplies that are made for consideration as part of a development lease agreement and refers to the decision of the High Court in Qantas and the Full Federal Court in AP Group. That may well be the case, but one must have regard to the observations of Justice Edmonds sitting in the Full Federal Court earlier this year in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33 at [29]:

We are not here concerned with whether a supply occurred on entry into a contract (cf., Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22;(2008) 236 CLR 342; Federal Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41; (2012) 247 CLR 286) or even with the characterisation of that supply it if did occur. We are here concerned with the character of a supply made as a result of performance of the terms and conditions of a contract. The terms and conditions are the instrumentality through which the supply is made, but the text of these terms and conditions is not conclusive of the character of the supply that is made; that will depend as much on the manner of performance of those terms and conditions as the text of the terms and conditions themselves; it will also depend on the commercial or business purposes, discerned objectively, of those who have entered into the relevant contract.

Having regard to the above statement, identifying the supplies that are made as a result of the performance of the terms and conditions of a development lease may require one to look beyond the terms of the contract.

The ruling considers the following issues in the context of a development lease agreement.

Issue 1 – grant of development lease

The ruling considers that the government entity makes a supply of land to the developer by way of lease or licence and that the rent is consideration for that supply. Also, in the absence of express terms or other evidence to the contrary, a lump sum payable on the grant of the lease is also consideration for the supply of land by lease or licence.

Issue 2 – the developer undertakes works on the land

The ruling considers that completing the development works is a supply of development services to the government agency. Also, the supply of the land to the developer by the government agency is consideration for that supply, if there is a sufficient nexus with the supply of the development services. There will be a sufficient nexus if the development lease arrangement makes the supply of the land subject to or conditional on the developer competing the development works.

Also, where the government agency grants a call option to the developer which entitles the developer to the transfer of the freehold or a grant of a long term lease, the grant of the call option is consideration for the developer’s supply of development services if the grant of the call option is subject to or conditional on the developer completing development works.

The ruling also considers that undertaking works on land which is to be retained by the government entity (eg, a car park on an adjacent site) can also be consideration which has a sufficient nexus to the supply of land by the government agency if the completion of those development works is a condition for the supply of the land.

Issue 3 – valuation of non-monetary consideration for supplies

Where the parties are at arm’s-length, the ruling considers that the things exchanged between the parties are of an equal GST-inclusive market value and the parties can use a reasonable valuation method agreed between them. For example, the full costing of the development works, as part of a competitive tender process, provides a reasonable basis for determining the GST-inclusive market value of the supply of development services by the developer and the price of the government agency’s related supply of land (or grant of a call option).

Issue 4 – attribution

The government agency’s GST liability for the supply of the land (or grant of a call option) is not attributable until the specified development is completed (or a specified stage is completed), unless an invoice has been issued or a monetary payment has been received in an earlier tax period.

For the developer, where no monetary consideration or invoice has been received, the GST liability for its taxable supply of development services is attributable to the tax period in which the supply of land is made (or call option is granted).

The ruling considers that the issue of a document by the developer notifying the government agency of an obligation to supply the land subject to the development works being completed is an invoice as defined in s 195-1 – and the developer’s GST liability is attributed to that tax period. The basis for this view is that an invoice is defined to mean “a document notifying an obligation to make a payment” and a party can be regarded as under an obligation to make a payment if “there is a requirement for either actual payment or, at lease, a present obligation to pay a sum certain at some future date”. The ruling notes that the practical outcome of this view is that where parties exchange invoices or tax invoices on entry into the development lease arrangement, or soon afterwards, their respective GST liabilities and input tax credit entitlements are attributable to the same tax period.