The long-awaited new GSTR 2015/2 (Development lease arrangements) confirms the ATO's recent approach to GST on Government infrastructure projects, and barter arrangements more generally.
After the withdrawal of its previous Ruling, GSTR 2008/2, on 11 May 2011 following the Gloxinia decision, the ATO has released GSTR 2015/2, which applies on and from the date of issue, Wednesday 3 June 2015.
While the final version of the Ruling is not significantly different to the draft Ruling, it will affect many aspects of government infrastructure works, including the timing of invoices (and hence cashflow).
More broadly, although it only applies to development lease arrangements (DLAs) involving a government agency, some of its principles may also apply to similar arrangements involving only private entities, particularly to barter arrangements.
What GSTR 2015/2 deals with – and what it doesn't
While there are variations between particular arrangements, GSTR 2015/2 lists the common features in relation to DLAs between a government agency and a developer. By reference to these features the Ruling considers:
- the principles for identifying and characterising supplies for consideration;
- the extent to which consideration includes non-monetary consideration;
- determining the value of non‑monetary consideration;
- when a supplier must attribute GST; and
- when a recipient can claim relevant input tax credit entitlements.
The Ruling does not consider the application of the GST provisions dealing with the grants of land by governments (sections 38-445 and 38-450), payment of taxes, fees and charges (Division 81) or in kind developer contributions required by law in return for rights to develop land (Division 82).
Transitional arrangements for current agreements
Where the parties are commercially committed to an arrangement the Commissioner will not disturb the GST treatment if the parties account for GST on the same basis and continue to apply the same basis for the entire life of the arrangement.
Alternatively, and subject to relevant time limits in the Taxation Administration Act 1953, the parties have six months from the date of release of the Ruling to revise their GST treatment in accordance with the Ruling.
Identification and characterisation of supplies for consideration
The identification of the supplies made for consideration is primarily determined by specific terms of an arrangement, but the substance of the entirety of the arrangement and whether the arrangements are implemented in accordance with the terms of the agreement will also be relevant.
Some of the more common actions by the parties to the arrangement are considered below.
Grant of a development lease or licence to the developer to undertake development works on the government land
The grant of the lease or licence by a government agency is a supply of land. Where there is rent to be paid by the developer, the rent is consideration for the supply of the land. A lump sum payment by the developer to the agency on the grant is also consideration for the supply of land by way of lease or licence, unless there are express terms or evidence to the contrary.
The developer undertakes works on the land owned by the agency
The developer makes a supply of development services to the agency. The supply of the freehold land or a long-term lease of the land by the agency to the developer is consideration for the developer's supply of the development services. There will be sufficient nexus between the supply of the development services and the supply of the land if the arrangement makes the supply of the land subject to or conditional on the developer completing specified development works.
If under the arrangement the agency grants a call option which, when exercised, entitles the developer to the land, and that grant is subject to or conditional on the developer completing the development works, then the grant is consideration for the supply of the development services.
If the call option is granted on:
- the entry into the development lease arrangement (or soon thereafter); and
- the developer's right to exercise the option is subject to or conditional on completion of the development works;
then the works are undertaken in connection with the exercise of the option, and the works supplied by the developer form part of the consideration for the transfer of the land when the option is exercised by the developer.
On the other side of the transaction, the transfer of the land by the agency is consideration for the developer's supply of development services.
Developer undertakes works on land owned by the agency that is not transferred to or attained by the developer
In this case, the developer is making a supply of development services to the agency. The additional works is non-monetary consideration for the supply of the land by the agency for the supply of the developer's additional works (and there will be a sufficient nexus between the two) if:
- the terms of the arrangement make the supply of the land subject to or conditional on the completion of the developer's additional works; and
- Division 82 does not apply. That is, the development services is deemed not to be consideration by the developer in return for a supply by the agency of a right to develop land.
Where there is a grant of a call option by the agency which is subject to or conditional on the completion of the additional works, the grant is consideration for the developer's supply of development services if Division 82 does not apply.
Value of non-monetary consideration
Where the consideration for a supply is non‑monetary consideration, the GST inclusive market value of that consideration is used to work out the price and value of the supply.
Where the parties are dealing with each other at arm's length, the Commissioner generally considers that the things exchanged between the parties are of equal GST inclusive market value. Therefore, the parties may agree to use a reasonable valuation method to determine the GST‑inclusive market value for the supplies made by each to the other and it is not necessary for the parties to obtain a formal valuation.
A reasonable method includes the full costing of development works undertaken by the developer as part of a competitive tender process which takes into account the full cost of construction (including builder margins) for determining the GST-inclusive market value of the supply of the development services. In the reverse it also provides a reasonable basis for calculating the price for the supply of land (or grant of a call option) by the agency for the supply by the developer of the development works.
Agency attribution of GST
The parties in relation to a DLA will generally be on a non-cash basis for GST purposes. The the GST liability or an input tax credit entitlement is attributable in the tax period in which any monetary payment is received or some or part of the non‑monetary consideration is received or an invoice is issued, whichever is the earlier.
The non-monetary consideration being the developer's development services for the supply of the land by the agency is not provided in part (or in full) until the conditions specified in the DLA are satisfied and the developer is entitled to the supply of the land or the grant of a call option. For example, on practical completion of the development.
In practical terms, the agency's GST liability for the supply of the land (or grant of the call option) is not attributable until the specified development is completed (or a specified stage of the development is completed) unless an invoice has been issued in an earlier tax period or a monetary payment has been received for the land (or call option) in an earlier tax period.
Developer attribution of GST
On the developer's side, where no monetary consideration has been provided or an invoice issued to the developer in an earlier tax period, the developer's GST liability for its taxable supply of development services is attributable to the tax period in which the agency supplies the freehold land or long-term leasehold interest (or the call option is granted).
GST liability and when invoices are issued
The issue of a document by the developer to the government agency on entry into a DLA or at any time afterwards, notifying the agency of an obligation to supply the land (subject to the development works being completed), will be an invoice for GST purposes.
If no monetary or non-monetary consideration for the developer's supply of the development services has been received by the developer in an earlier tax period, the developer's GST liability for its taxable supply of development services is attributable to the tax period in which the invoice is issued. Correspondingly, the agency is entitled to an input tax credit for its acquisition of the development services in the same tax period.
On the agency's side, the issue of a document on the entry into a DLA or at any time afterwards, notifying the developer of its obligation to deliver the development services, will be an invoice for GST purposes. Unless monetary or non-monetary consideration has been received by the agency in an earlier tax period, the agency's GST liability for the taxable supply of the land is attributable to the tax period in which the invoice is issued. In turn, subject to the requirement to hold a tax invoice, a developer is entitled to an input tax credit for its acquisition of land in the same tax period as the issuance of the invoice by the agency.
The practical upshot is that if parties to a DLA exchange invoices on the entry into the arrangement, their respective GST liabilities and corresponding input tax entitlements are attributable to the same tax period.