NSW Commissioner of State Revenue issues Revenue Ruling on market value and GST

The New South Wales Office of State Revenue has issued Revenue Ruling No. DUT 045 “Market Value and GST” where the Commissioner concludes that it is not possible to determine a GST-exclusive market value and that the value of land will include any GST which the vendor may be liable to pay.

The Commissioner has also stated that he will not accept a valuation as a market valuation that is expressed to be on a “GST-exclusive” basis or where the valuer was instructed to make a determination of market value on that basis. The reason for this view is that the Commissioner accepts the view of the Courts in a line of authorities (including Storage Equities Pty Ltd v Valuer-General [2013] NSWLEC 137) that while GST may have an impact upon the market value of property, it is a not a separate amount to be deducted when determining the market value of the item. My post discussing the decision in Storage Equities can be accessed here.

The ruling observes that the Court’s conclusion in Storage Equities was that the land value is the amount expected to be received on the sale of the land, including any GST which the vendor may be liable to pay. The ruling also considered the following points of the decision to be noteworthy:

  • The starting point for determining land value is the test articulated in Spencer v Commonwealth (1907) 5 CLR 418, namely the price negotiated between a hypothetical willing vendor and a hypothetical willing purchaser, both having access to all current information affecting the property (see paras [24], [42] and [44]);
  • The impact of GST upon each of the vendor and purchaser depends upon their particular, individual circumstances. However, the hypothetical vendor under the Spencer test cannot be assumed to have attributes (eg: GST registered or selling as a going concern) which affect the GST consequences of the sale for the vendor (see paras [45], [46] and [47]);
  • In determining value by reference to comparable sale transactions, no adjustment should be made to those transactions on account of any GST liability of the vendor (see para [48]).

The Commissioner also noted that the view in the ruling was consistent with the policy of the Valuer General.

The ruling refers to the following simple example:

A valuer is engaged to value 2 residential properties located side by side. On the valuation date, one property is a newly completed house which has never been occupied and the other is an established home built some years before.

The valuer would need to take GST into account when determining the market value of the first property, but not the second, because GST is not payable on the sale of  an established home. To complete the engagement, the valuer will need to determine a market value for each property. But it would not be open to the valuer to determine a “GST-exclusive” market value for the first property. That would be contrary to the decided cases and the Valuer General’s policy.



Draft ruling issued on development leases with government agencies

Yesterday the Commissioner issued draft GST Ruling GSTR 2014/D5 ‘Goods and Services tax: development lease arrangements with government entities’.

The draft ruling outlines the Commissioner’s views on the GST treatment of arrangements between government entities and private developers that typically have the following features:

  • the private developer undertakes a development on land owned by a government agency in accordance with the terms of a written agreement between the developer and the government agency; and
  • the government agency supplies the land by way of freehold or grant of a long term lease to the developer, subject to the developer undertaking the development in accordance with the terms of the written agreement – that is, the developer becomes entitled to a transfer of the freehold or grant of a long term lease when the development is completed.

The ruling is comprehensive and considers the following matters:

  • the relevant principles for identifying and characterising the various supplies that are made for consideration under a development lease arrangement;
  • whether the grant of a short-term lease or licence (development lease) by the government agency to allow the developer to undertake the development on land is a supply for consideration;
  • whether, in completing the words on land owned by the government agency, the developer makes a supply of development services to the government agency for consideration;
  • whether the sale of the freehold or grant of the long-term lease of land by the government agency is a supply for consideration, and whether any consideration the developer provides for supply of the land includes undertaking of the development words on land owned by the government agency;
  • the extent to which the consideration for particular supplies made under a development lease arrangement includes consideration that is not expressed as an amount of money, that is, non-monetary consideration;
  • how the value of any non-monetary consideration provided for supplies made in the context of a development lease arrangement may be determined; and
  • the attribution, under Division 29, of the GST liabilities and input tax credit entitlements that may arise under development arrangements.

My analysis of the draft ruling can be accessed here.

Comments on the draft ruling are due by 9 January 2015.

Tribunal decision on sale of property under vendor finance agreement

Yesterday the Tribunal handed down its decision in Rod Mathieson Truck Hire Pty Ltd as trustee for the Mathieson Family Trust and Commissioner of Taxation [2013] AATA 496 which affirmed the decision of the Commissioner that the taxpayer was liable for GST on the entire amount of consideration payable for the sale of land, notwithstanding that part of the consideration was lent to the purchaser under a vendor finance arrangement and the loan was only partially repaid.

The case illustrates the need to take care in structuring transactions and that different GST outcomes can arise out of transactions which on the surface may appear the same, but have different legal outcomes.

The facts were as follows:

  • the taxpayer agreed to sell property to the purchaser for a price of $3,177,650 plus GST.
  • the purchaser was unable to pay the whole amount of the purchase price and at settlement the purchaser paid the sum of $2,017,885 and the parties into a document described as a Settlement Balance Facility Agreement (whereby the taxpayer advanced the sum of $1,498,682.69 to the purchaser which was to be paid to the vendor at settlement).
  • The advanced monies required to be repaid after settlement, but payment was not made. A deed of variation was subsequently entered into whereby $500,000 was to be paid and three developed lots were to be transferred to the taxpayer – the money was paid, but the lots were never transferred

The Commissioner contended that the taxpayer had received full consideration for the transfer of the land at settlement, being the payment of $2,017,895 and $1,477,520 through the Settlement Balance Facility Agreement. Both these payments fell within the definition of “consideration” in s 9-15 of the GST Act.

The taxpayer contended that it was erroneously made liable to account for GST on consideration which was promised but had not been received. It contended that the proper approach was to look at the substance and reality of the transaction which amounted to a deferral of payment of the purchase price under the contract of sale (part of which was never paid). Alternatively, the loan transaction (if properly so-called) was simply ancillary to a single or dominant supply under the contract of sale.

The Tribunal distinguished between this case (being a loan of part of the purchase price) and one where a sale is made on credit, which may well have had a different GST outcome. As noted at [23]:

However, there is a clear distinction between a sale on credit and the dealings here between the Trust and the Purchaser. The contract for sale did not provide for any form of credit and it was not varied to do so. There may have been other options than the one employed by the parties when it became apparent that the Purchaser did not have the money to complete. A differently structured solution, in the circumstances that transpired, may have led to a different GST outcome. However, the Trust and the Purchaser adopted the method outlined above, and the fact that things did not turn out as planned is not an opportunity to recast what has already occurred.

The Tribunal concluded that there was plainly a loan agreement and a loan. Further, the obligation to advance the loan monies was set-off at settlement against the purchaser’s obligation to pay for the Property (thereby constituting full consideration). Thereafter, the taxpayer’s rights against the purchaser were not under the Contract of Sale (eg, as recovery of unpaid purchase price), but under the Settlement Balance Facility Agreement and the Mortgage which secured the loan.