Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Supplies in return for rights to develop land

Outline of chapter

1.1 Schedule 1 to this bill amends the GST Act, so that GST does not apply to a supply made in return for a supply, by an Australian government agency, of a right to develop land. GST will also not apply to the corresponding supply of the right to develop land.

Context of amendments

1.2 Local authorities and other government agencies often require entities, such as land developers, to supply them or a third party, assets, real property and/or services in return for the granting of a right to develop land. In this context, the supply made by a developer will be referred to as the supply of an in kind developer contribution.

1.3 Currently, where both parties are registered or required to be registered for GST, the transaction can involve 2 taxable supplies, with both parties required to remit GST.

1.4 Representatives of organisations involved in land development have advised that a number of issues arise from the current treatment of an in kind developer contribution as a taxable supply. For instance, in some circumstances there are significant timing differences that can arise between the time an entity incurs a GST liability on a supply, and the time it is entitled to claim an input tax credit in relation to any corresponding acquisition from the other party to the transaction. There are also practical problems arising from the need to value the consideration received for the supply of an in kind developer contribution. Further, no entity may be entitled to claim an input tax credit where an in kind developer contribution is supplied to a third party in return for the supply by a government agency of a right to develop land.

1.5 In addition, developers may, where possible, be inclined to make a cash payment, and thereby not incur a GST liability, in return for the right to develop land, instead of contributing capital infrastructure that would otherwise have to be provided by government agencies in relation to a development.

Summary of new law

1.6 This bill will amend the GST Act to ensure that:

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a supply, by an Australian government agency, of a right to develop land, is not treated as consideration for the supply of an in kind developer contribution, if the supply of the in kind developer contribution complies with requirements imposed by, or under, an Australian law. Therefore, the supply of an in kind developer contribution will not be a taxable supply; and

•

a supply, by an Australian government agency, of a right to develop land, is treated as a supply that is not made for consideration to the extent it is made in return for the supply of an in kind developer contribution that complies with requirements imposed by, or under, an Australian law. Therefore, the supply of the right to develop land will not be a taxable supply.

Detailed explanation of new law

1.7 Division 82 is inserted into the GST Act. This Division ensures that GST does not apply to either a supply of an in kind developer contribution, or to the supply by an Australian government agency of a right to develop land that is supplied in return for a supply of an in kind developer contribution. [Schedule 1, item 4, section 82-1]

1.8 Subsection 82-5(1) ensures that the supply, by an Australian government agency, of a right to develop land is not treated as consideration for the supply of an in kind developer contribution, if the supply of the in kind developer contribution complies with requirements imposed by, or under, an Australian law. As noted in paragraph 1.2, the supply can be of anything, such as assets, real property and or services. [Schedule 1, item 4, subsection 82-5(1)]

1.9 Where subsection 82-5(1) applies, a supply of an in kind developer contribution will be a supply that is made for no consideration. Therefore, the supply will not be a taxable supply as defined in section 9-5 of the GST Act.

1.10 Australian government agency and Australian law have the meaning given to those terms as currently contained in section 195-1 of the GST Act.

1.11 Subsection 82-5(2) ensures that the supply of a right to develop land will not be consideration for a supply of an in kind developer contribution, even though the in kind developer contribution is made to an entity other than the Australian government agency that provides the right to develop land. For example, where a developer, in order to obtain a right to develop land from a local council, makes a supply of capital works to a Statutory Authority, the supply of the right will not constitute consideration for the supply of works made by the developer. [Schedule 1, item 4, subsection 82-5(2)]

1.12 Subsection 82-5(3) ensures that section 9-15 of the GST Act will not apply to treat as consideration, the supply of a right to develop land made by an Australian government agency in the circumstances to which subsections 82-5(1) and (2) apply. [Schedule 1, item 4, subsection 82-5(3)]

Example 1.1

Rushmore Council is an Australian government agency. It provides planning approval in the form of a right to develop land under a State Planning Act. The State Planning Act allows Rushmore Council to require developers to provide capital works either to itself, or to another party, in return for the provision of a right to develop land.

Yellow P/L, a local land developer, is provided by Rushmore Council with a right to develop land. Yellow P/L is required to supply to Rushmore Council capital works in relation to the completed development. The supply of the capital works constitutes a supply of an in kind developer contribution.

The supply, by Rushmore Council, of the right to develop land will not constitute consideration for the supply made by Yellow P/L of the capital works. Therefore, Yellow P/L has not made a taxable supply of the capital works to Rushmore Council.

1.13 Subsection 82-10(1) ensures that the supply, by an Australian government agency, of a right to develop land is treated as a supply that is not made for consideration to the extent it is made in return for the supply of an in kind developer contribution that complies with requirements imposed by, or under, an Australian law. [Schedule 1, item 4, subsection 82-10(1)]

1.14 Subsection 82-10(2) ensures that the supply of the right to develop land is treated as a supply that is not made for consideration where the recipient, in order to obtain the right, makes a supply of an in kind developer contribution to a third party. [Schedule 1, item 4, subsection 82-10(2)]

1.15 Where subsections 82-10(1) and (2) apply, a supply by an Australian government agency of a right to develop land is a supply that is made for no consideration, and therefore, the supply will not be a taxable supply as defined in section 9-5 of the GST Act.

1.16 In the term 'right to develop land', land has its common law meaning. The supply of a right to develop land includes, by way of example, approval by an Australian government agency for such things as:

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a re-configuration with no change in use (subdivision);

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no re-configuration, but a material change in use (rezoning);

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re-configuration with use as a right (permitted subdivision); and

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re-configuration with change in use (subdivision and rezoning).

1.17 The supply, by an Australian government agency, of a right to develop land is made in return for a supply of an in kind developer contribution, even though the right is supplied upon the condition that the recipient has obtained agreement in relation to the proposed development from another entity, such as another government agency. For example, where a local council supplies a right to develop land to a developer upon condition that the developer has obtained agreement in relation to the proposed development from a Statutory Water Authority.

1.18 Under subsection 81-5(1) of the GST Act, the payment of any Australian tax, fee or charge is treated as consideration provided to an Australian government agency to which the tax, fee or charge is payable, for a supply that the agency makes to the payer. The supply, of an in kind developer contribution, made to an Australian government agency in return for the right to develop land, may constitute the payment of an Australian tax, fee or charge. Thus, the supply of a right to develop land may be a taxable supply. Subsection 82-10(3) ensures that if the supply of an in kind developer contribution is a payment of an Australian tax, fee or charge, subsection 82-10(1), and not subsection 81-5(1), applies to the payment. That is, the supply of a right to develop land is not a taxable supply. [Schedule 1, item 4, subsection 82-10(3)]

1.19 Subsection 82-10(4) ensures that section 9-15 of the GST Act, will not apply to treat as consideration, anything supplied to an Australian government agency, in return for a right to develop land in the circumstances to which subsections 82-10(1) and (2) apply. [Schedule 1, item 4, subsection 82-10(4)]

Example 1.2

Assume the same facts as set out in Example 1.1.

Rushmore Council's supply of a right to develop land to Yellow P/L, will be a supply that is not made for consideration, and therefore, will not be a taxable supply.

This will be the case, even if the supply of capital works made by Yellow P/L to Rushmore Council constitutes the payment of an Australian tax, fee or charge imposed by Rushmore Council under the State Planning Act, in relation to the provision of the right to develop land.

1.20 Item 9A is inserted into the table in section 9-39, which is about special rules relating to taxable supplies, while item 30A is inserted into the table in section 37-1, which is a check list of special rules, in recognition of the insertion of Division 82 into the GST Act. [Schedule 1, items 1 and 2]

1.21 A new note is placed at the end of subsection 81-5(1), which is about the treatment of a payment of an Australian tax, fee or charge to an Australian government agency, to provide guidance as to the existence of Division 82. [Schedule 1, item 3]

Application and transitional provisions

1.22 The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting, or that started, on or after 1 July 2000. [Schedule 1, item 6]