The Commissioner has ended the 10 year discussion on how the margin scheme works for major developments in the ACT. Many developers have received large GST refund in the past but these won’t be happening going forward.
However, while the Commissioner states his new Determination, GST Determination GSTD 2021/1, is retrospective he states that developers with “favourable private ruling can continue to rely on that ruling “in all aspects of the development arrangement”.
The issue that we have been discussing for 10 years is what is the purchase price of the land under the margin scheme – the higher the purchase price, the smaller the margin and the less GST that is paid to the Commissioner.
While everyone agrees that any cash paid by the developer to the government for the long term lease of 99 years you get in the ACT is part of the purchase price, the question is also do we include various non-monetary consideration for all the works the developer has to do?
In these arrangements, a developer enters into a contract for the grant of a long-term Crown lease over land in the ACT but the contract is contingent upon the developer entering into a project delivery agreement. This involves possibly adding utilities to the land and footpaths or even roads and guttering. It might also involve parks and other community assets.
So what of all these required activities in the project delivery agreement can be treated as non-monetary consideration and added to the purchase price under the margin scheme to decrease the margin and decrease the GST that must be paid?
The Determination states that obviously the building works carried out by the developer are not non-monetary consideration for the supply of the Crown lease.
However, regarding other site works, if ownership of these works is retained by the developer, they are not non-monetary consideration for the supply of the lease either.
This means that only site works that end up being owned by the government under the project delivery agreement are non-monetary consideration for the supply of the lease.
Here are the examples the Commissioner has given…
Example 1 – apartment development project
Borage Builders, a developer, wants to acquire land in the ACT so that it can build apartments to ultimately sell to third parties. It enters into the following arrangements:
- A contract with a government agency to be granted a 99-year Crown lease over land in the ACT for $5 million paid at completion of the contract.
- The purchase price for the Crown lease takes the permitted uses and conditions into account. Once Borage Builders pays the full purchase price of $5 million to the government agency, and the government agency then grants the Crown lease to Borage Builders, the contract is complete.
- A PDA with a government agency (entered into at the same time as the contract).
- The Crown lease and PDA provide that Borage Builders must complete works (an approved development) within four years from the commencement of the Crown lease. The approved development consists of
- building works to construct 100 apartments on the land
- associated site works
- building works to construct 100 apartments on the land
- stormwater service on the Crown lease land connecting to the tie point at the stormwater main that will be retained by Borage Builders
- stormwater main on the Crown lease land that will be transferred to a utility provider and subject to an easement to the ACT government which allows the utility provider to access the stormwater main for maintenance and replacement purposes
- sewerage and water connections on the Crown lease land for the apartment building
- a heavy-duty concrete driveway – this will be constructed partly on the Crown lease land and partly on unleased land, and
- construction of various footpaths and street lighting on unleased land.
- Borage Builders pays a security deposit which is an estimate of the cost of the associated site works to be retained by the government agency. The security deposit is returned to Borage Builders on completion of these works.
- The Crown lease may be terminated if the approved development is not completed within the four-year timeframe.
- Borage Builders is also required to make 10% of the apartments available for sale as affordable housing for low-to-moderate income earners identified by the ACT Government (affordable housing arrangement). Under the affordable housing arrangement, the ACT Government sets a maximum price for these apartments. The ACT Government then requires the developer to provide the identified buyer with the first right of refusal to purchase the property.
- The approved development was constructed after completion of the contract and the grant of the Crown lease. The construction costs were $100 million.
Borage Builders completes the building works in accordance with the building arrangements entered into. The building works undertaken (although they are fixtures) are owned by Borage Builders for the duration of the Crown lease. Only Borage Builders is able to sell or lease the apartments (dwellings) built on the Crown lease land.
Any increase in value from construction of the dwellings increases the value of the Crown lease that is already held by Borage Builders. It has minimal if any impact on the value of the reversion held by the Crown.
The government agency does not obtain anything of measurable economic value from the construction of dwellings on the Crown lease land. The Crown lease land, with or without a dwelling, continues to attract a nominal rent.
As the building works do not provide anything of measurable economic value to the government agency, there is nothing that amounts to additional consideration for the supply of the Crown lease.
Borage Builders does not make a supply of the building works to the government agency. The government agency does not make a creditable acquisition of the building works constructed on the Crown lease land.
Associated site works – retained by developer
Under the building arrangement, Borage Builders is required to construct on the Crown lease land:
- sewerage and water connections for the apartment building
- a stormwater service connecting to the tie point at the stormwater main, and
- a driveway from the apartments up to the property boundary.
This work is to be retained by Borage Builders. The associated site works are completed in accordance with the building arrangements entered into. The government agency does not obtain anything of measurable economic value from the construction of these associated site works on the Crown lease land.
As the associated site works do not provide anything of measurable economic value to the government agency, there is nothing that amounts to additional consideration for the supply of the Crown lease.
Borage Builders does not make a supply of these associated site works to the government agency. The government agency does not make a creditable acquisition of these associated site works constructed on the Crown lease land.
Associated site works – not retained by the developer
Under the building arrangement, Borage Builders is required to construct various footpaths, street lighting and the part of a driveway for the apartments on land that is not subject to the Crown lease. They are also required to construct a stormwater main that is subject to an easement to the ACT Government on the Crown lease land. The stormwater main becomes the property of the ACT Government.
The ownership of these works will not be retained by the developer. These associated site works represent something that the government would usually or commercially pay money to acquire and have a measurable economic value.
These associated site works are non-monetary consideration for the supply of the Crown lease land. The value of the non-monetary consideration is determined in accordance with the principles set out in GSTR 2001/6.
The affordable housing obligation is merely a restriction on the type of development undertaken, in the similar way that a government agency can impose height limitations on the building or requirements for external finishes. Such limitations on the leasehold do not demonstrate that something is provided to the government agency as consideration for the grant of the lease. Performance of this obligation does not result in the works creating the affordable housing being provided as non-monetary consideration for the grant of the Crown lease.
Example 2 – apartment development project
Assume the same facts as in Example 1 of this Determination. However, Borage Builders has entered into further arrangements with the government agency to complete additional works on unleased land, being the provision of a car park for the monetary sum of $900,000. These arrangements are distinct from the works for the approved development and are not consideration for the supply of the Crown lease land. The consideration was agreed to separately, and Borage Builders and the government agency have not entered into an arrangement where they have agreed to reduce the price of the supplies (the supply of the car park and the supply of the Crown lease) that they make to each other for consideration.
There is no nexus between the supply of the Crown lease and the supply of the additional works on the unleased land. The construction of the car park is not non-monetary consideration for the supply of the Crown lease.
This will be a supply of additional works to the government agency for specific monetary consideration of $900,000. It will not affect the consideration for the supply of the Crown lease.