2016 National GST Intensive - Amazon S3 · 2016 National GST Intensive The tips and traps with little known exemptions Written by: Rhys Guild Partner MinterEllison Jane Spencer Special

Rhys Guild The tips and traps with little known exemptions

© Rhys Guild, MinterEllison 2016 1

ME_132149621_1 (W2013)

2016 National GST

Intensive

The tips and traps with little known

exemptions

Written by:

Rhys Guild

Partner

MinterEllison

Jane Spencer

Special Counsel

MinterEllison

Presented by:

Rhys Guild

Partner

MinterEllison

Hana Thorson Graduate

MinterEllison

National Division

8 – 9 September 2016

Four Points by Sheraton, Sydney



ME_132149621_1 (W2013)

CONTENTS

1 Introduction .................................................................................................................................... 4

2 Why is affordable accommodation important?........................................................................... 5

3 Student accommodation ............................................................................................................... 6

3.1 When is a supply of student accommodation GST-free? ......................................................... 7

3.2 Case study – student housing .................................................................................................. 8

3.2.1 Traditional Model – outsourcing by way of lease .............................................................. 9

3.2.1.1 Traditional model - GST consequences....................................................................... 10

3.2.2 Alternative model – Manager acts as University's agent ................................................. 10

3.2.2.1 Alternative model - GST consequences ...................................................................... 12

3.2.3 Conclusion ....................................................................................................................... 14

4 Social housing .............................................................................................................................. 15

4.1 When is a supply of social housing GST-free? ....................................................................... 15

4.2 Case study – social housing ................................................................................................... 15

4.2.1 Traditional model ............................................................................................................. 16

4.2.2 Traditional model - GST consequences .......................................................................... 17

4.2.3 Alternative model ............................................................................................................. 20

4.2.4 Alternative model – GST consequences ......................................................................... 21

4.2.5 Conclusion ....................................................................................................................... 24

5 GST and health care – some interesting examples .................................................................. 26

5.1 Introduction .............................................................................. Error! Bookmark not defined.

5.2 GST-free health services concessions .................................... Error! Bookmark not defined.

5.2.1 Introduction of section 38-60 of the GST Act .................................................................. 28



ME_132149621_1 (W2013)

5.2.2 Section 38-60 of the GST Act in practice ........................................................................ 29

5.2.3 Conclusion ....................................................................................................................... 31



ME_132149621_1 (W2013)

1 Introduction

This paper considers some of the GST concessions that are not necessarily the most prominent or

debated, but are nonetheless of considerable import to those to whom they apply.

The issues around student and social housing are often referred to in the mainstream and financial

media and these sectors appear to be creating some element of 'buzz' over recent months. Less

commonly raised but equally as important are the recently introduced concessions regarding health

supplies that are funded by third parties. These provisions are likely to become increasingly important

given the recent experience in New South Wales where, for the first time, public healthcare services

will be provided by a private operator1.

Specifically, the concessions that are available in these areas are intended to ensure that these

supplies are provided without any embedded GST cost and therefore serve the public policy aim that

these supplies are provided to consumers at the lowest (tax) cost possible.

From an advisor's perspective, the policy considerations that underpin these concessions are of

particular relevance when considering the various commercial structures, largely developed by the

private sector, that underpin the ultimate provision of these services to consumers, particularly in the

context where the statutory framework is arguably unnecessarily narrow in its scope.

Accordingly, without careful consideration of each step of a transaction, it is often the case that the

policy intent is negated by an unintended (or unanticipated) GST cost arising at some point in the

supply chain, which in the author's experience is more often than not ultimately borne (either directly

or indirectly) by the consumer through the final pricing of the transaction.

1New Northern Beaches Hospital (see http://nbhsredev.health.nsw.gov.au/project/northern-beaches-hospital/)



ME_132149621_1 (W2013)

2 Why is affordable accommodation

important?

The policy considerations underlying the concessions that are available for affordable accommodation

(for both lower income earners and students) is particularly worthy of consideration in the context of

the application of the applicable GST concession. First, it is important to recognise that the underlying

rationale of extending GST-free treatment to supplies made by charities for less than market value (or

cost) is to ensure that those supplies are provided without any embedded GST cost2.

In this context, the need for affordable accommodation, particularly in our major urban areas, has

never been higher. Newspapers regularly contain articles bemoaning the fact that a growing

proportion of residents are increasingly being priced out of the housing markets in these areas. For

example:

1. the Daily Telegraph noted a BankWest report has identified that 84% of Sydney suburbs had

average house prices that were more than five times the average earnings of police, fire fighters

and paramedics3;

2. the Sydney Morning Herald4 has reported that community housing provider Link Housing listed

81 affordable units for rent in Sydney and received 84,788 views and 4,037 applications. That

same article noted that the Department of Family and Community Services had more than 59,000

people on its waitlist for affordable housing;

3. the Herald Sun5 recently reported that analysis by SGS Economics concluded that for every $1

spent on social and affordable housing, the saving to the economy is $7; and

4. the Sydney Morning Herald6 has reported that only 2% of new developments in the City of

Sydney are reserved for affordable housing tenants, far short of the Council's target of 7.5%.

In this paper the GST issues around two common forms of affordable accommodation are considered,

namely student accommodation and social housing.

2 See paragraph 5.104 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998. 3 Daily Telegraph, Prices put squeeze on crucial workers, Feb 27, 2014. 4 November 21, 2015, Slim Pickings for renters in Sydney. 5 July 26, 2016 – Lack of Housing hits society and the economy. 6 13 July 2015 – Housing affordability crisis has essential works fleeing Sydney.



ME_132149621_1 (W2013)

3 Student accommodation

The characterisation of student accommodation for GST purposes has had a somewhat colourful

history. This is partly because, unlike most other supplies to which GST applies, it possible for this

supply to be classified as taxable, GST-free or input taxed without there necessarily being any

material difference in the substance or nature of the supply itself. Rather, the classification of the

supply is at least as dependent on the identity and characterisation of the supplier and the

consideration that is provided for the supply.

In 2010, the Commissioner of Taxation (Commissioner) released an Interpretive Decision expressing

the tax office view that the supply of student housing will normally be an input taxed, rather than

taxable, supply.7 That is, the Commissioner took the view (in the author's view appropriately) that the

provision of accommodation to students in halls of residence (albeit for terms of generally no more

than 52 weeks) was appropriately categorised as an input taxed supply of leasing of residential

premises.

The waters were muddied by the decision in ECC Southbank Pty Ltd v FCT8 where the Federal Court

found that certain supplies of accommodation in the facility in question (which included

accommodation provided to students) were supplies of 'commercial residential premises' and not

'residential premises' and therefore, taxable supplies attracting GST. While the facility in this case was

not run by a university and was not on campus, it was perhaps surprising that the court was not asked

to address (and did not chose to otherwise comment on) the exception to the definition of commercial

residential premises that normally applies to 'premises to the extent that they are used to provide

accommodation to students in connection with an education institution'.

Notwithstanding the decision in Southbank, there have since been a number of private rulings issued

by the Commissioner which confirm that the supply of accommodation to students in university halls

of residences is prima facie input taxed9.

Accordingly, while some in the private sector will adopt the position that they are making taxable

supplies (per Southbank) and will seek to mitigate their GST liabilities through the operation of

Division 87 of the GST Act, others will attempt to structure their offering to distinguish themselves

from Southbank and simply adopt input taxed treatment.

Ultimately, in the context of the above, it is submitted that student accommodation is, by its very

nature, a supply that should be considered as inherently suitable for GST-free treatment. This should

7 ATO ID 2010/194. 8 ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795. 9 For example, see edited private binding ruling 1012373581323 which confirms that such supplies are input taxed pursuant to

section 40-35 of the GST Act.



ME_132149621_1 (W2013)

be the case even when a university seeks to 'outsource' the management and operation of its student

accommodation facilities to the private sector.

3.1 When is a supply of student accommodation GST-free?

The supply of accommodation will be GST-free pursuant to subsections 38-250(1) and (2) of the GST

Act where the supply is:

1. made by an endorsed charity, gift deductible entity or government school; and

2. for consideration that is either:

a. less than 75% of the GST inclusive market value of the supply; or

b. less than 75% of the cost to the supplier of providing that accommodation.

In most cases, universities will satisfy the first requirement by virtue of being an endorsed charity or

gift deductible entity.

The issue therefore becomes whether the rents charged satisfy one of the criteria listed in paragraph

b. In our experience, the former category is the generally the most relevant – that is, that the rent is

less than 75% of market value.

The term 'market value of the supply' is not defined by the GST Act, however, the Commissioner has

published guidelines which, amongst other things, adopts the common law test that the market value

of a thing is 'the price that would be negotiated between a knowledgeable, willing, and not anxious

buyer and a knowledgeable, willing and not anxious seller acting at 'arm's length' in an appropriate

market'.10

To further assist in determining the market value of a supply, the Commissioner’s guidelines set out

the following successive tests to determine the market value of a supply:

1. the organisation must determine whether the same supply exists within the market it operates in

(the 'same supply' test). If the 'same supply' exists in the market, the price of this supply is the

market value that the organisation should use in its calculations;

2. if no 'same supply' exists, the organisation must then determine whether a similar supply exists

within the market it operates in (the 'similar supply' test). If there is a 'similar supply', and no

'same supply' exists in the market, the price of the 'similar supply' is the market value that the

organisation should use in its calculations; and

10 Charities Consultative Committee Resolved Issues Document (Market Value Guidelines).



ME_132149621_1 (W2013)

3. if no 'same supply' or 'similar supply' exists, the organisation may seek the Commissioner's

approval to use another methodology to calculate the market value of the supply.

It is submitted (potentially controversially) that in the context of applying these principles to the supply

of student accommodation there can almost never be a 'same' supply. That is, by definition, one of the

key characteristics of the supply is the location from which it is provided. As such, it is simply not

possible (without breaking the laws of physics) for there to be a 'same' supply when determining the

market value of a supply of university accommodation. This is important, because it means that any

test of market value for accommodation must, by definition, apply the 'similar' supply test.

Once the 'similar supply' test is accepted as being appropriate, then it is also necessary to recognise

that there may be a variety of 'similar' supplies and this will often involve consideration of a number of

alternative accommodation supplies, each of which shares some characteristics of the underlying

supply. In the context of student accommodation, it is submitted that location and proximity to the

campus will often be as important as the nature of the types of rooms supplies. Accordingly, in our

experience, while the Commissioner's residential tool provides a form of 'safe harbour' for setting

rents under the 75% threshold, there will often be strong arguments to support a broader investigation

– that is, it will often be appropriate to determine market rents by reference to the residential leasing

market in the suburbs in which the facility is located, rather than attempting to compare rents in other

halls of residence located in other parts of the relevant town or city.

Accordingly, it is submitted that there are a number of situations where the supply of accommodation

in the higher education sector can and should be provided in a GST efficient manner. In this context,

set out below is a case study that considers the GST consequences arising from the 'traditional'

model that has been adopted by higher education institutions supplying student accommodation

facilities and an alternative structure for the holding and leasing of such facilities that produces a GST

neutral outcome.

3.2 Case study – student housing

The following case study illustrates the GST leakage that arises under a 'traditional' model of

outsourcing of student accommodation compared to a model that has the same substantive economic

outcome but which preserves the GST-free status that, it is submitted, appropriately applies to such

supplies.

For the purposes of this case study assume that:

1. a university owns land that it wishes to develop into a new student housing accommodation

facility;

2. the university is GST registered at all relevant times and is an endorsed charity and/or gift

deductible entity able to access the GST-free concession under section 38-250 of the GST Act;



ME_132149621_1 (W2013)

$ $

3. to the extent that is commercially achievable, the university wishes to outsource the

management, development and on-going operations of the new facility.

Set out below are examples of a model that has historically be adopted, whereby the above

arrangements are effected by way of a lease to a manager / operator, compared to an alternative

model that involves an agency arrangement.

3.2.1 Traditional Model – outsourcing by way of lease

One of the models that has been historically adopted by some institutions involves granting a lease

over the entire residential properties to an accommodation manager that in turn, leases individual

units of accommodation to students. Under this lease arrangement, the manager is obliged to

sublease the premises to students of the institution and otherwise provide accommodation on certain

terms consistent with the university's charter etc.

Often the institution will seek some form of premium from the manager for the right to be granted the

lease, reflecting the inherent value of the facility to the university and the fact that the manager will

seek to run the operations for a profit (having a captive customer base).

This traditional model in the context of the case study facts noted above is represented

diagrammatically below.

Admin Costs (legal

accounting, etc.)

$ Rent

(+Premium?)

$

University

Manager

Students

Traditional model

Lease

Lease $ Rent

Builder

Land Owner



ME_132149621_1 (W2013)

3.2.1.1 Traditional model - GST consequences

Lease of the premises to the manager

Under the traditional model, pursuant to section 40-35 of the GST Act, the lease of the premises by

the university to the manager is an input taxed supply. Accordingly, the university is unable to claim

input tax credits for GST on any costs incurred on the acquisition of the land, payments to builders or

any administration costs. Additionally, in the event that the university requires the accommodation

manager to pay a lease premium in addition to rent, the lease premium will also be input taxed.

Supply of student leases by manager

Likewise, the subsequent lease of the residential accommodation by the manager to students will be

input taxed (noting our comments above that the Commissioner has in our experience adopted the

position that the decision in Southbank can be distinguished where the accommodation in question is

located on campus). This is on the basis that the supply of most student accommodation provided in

relation to on-campus facilities will fall within the exception in the definition of 'commercial residential

premises set out in section 195-1 of the GST Act. That is, on-campus facilities generally are premises

that are used to provide accommodation to students in connection with an education institution that is

not a school, such that leases of these premises is specifically excluded from the definition of

commercial residential premises and so remains input taxed pursuant to section 40-35 of the GST

Act. The manager cannot claim credits for any GST incurred on any costs to run the facility and

accordingly incurs a GST cost on these inputs11. This arrangement produces a sub optimal GST

outcome and is wholly inconsistent with the policy intention that such supplies should be provided

without an embedded GST cost.

3.2.2 Alternative model – Manager acts as University's agent

Set out below is an alternative which produces a GST efficient outcome compared to the traditional

model. Rather than lease the building to a manager, the university appoints the manager to:

1. act as its agent to enter into leases with the students; and

11 It is noted that the supply of accommodation on a temporary basis during the holiday period (when students are not present)

will often be a taxable supply of commercial residential premises, such that in many cases the manager will be entitled to a

proportion of credits as a result of making such supplies. This is on the basis that the accommodation provided in most student

accommodation facilities will meet the definition of 'commercial residential premises' on that basis that it is similar to a 'hotel,

motel, inn, hostel or boarding house', and is not normally not provided to students in connection with an education institution.

As such, holiday accommodation generally does not fall within the exemption that otherwise excludes on-campus student

accommodation from the scope of commercial residential premises.



ME_132149621_1 (W2013)

$ $ $

2. manage the property for the university.

For GST purposes, where an agent makes a supply on behalf of a principal, the supply is treated as if

it was made by the principal.12 Under this model, the university retains its position as the lessor and

the manager provides services to the university. Pursuant to this arrangement, the manager collects

rent from students on behalf of the university, enters leases with students acting as the university's

agent and supervises the day-to-day running of the residential accommodation facilities.

In exchange for these services, the university pays the accommodation manager a fee, funded by a

portion of the rental amounts collected from resident students. The management services fee is

calculated as an arm's length amount to reflect the cost of the provision of such services, plus an

additional mark-up. If required, the manager may also choose to outsource some or all of its

management functions to a different operator, for which it would pay an operator fee.

12 See public ruling GSTR 2000/37 and particularly paragraph 15.

$ Management

Fee

Enters lease as

Uni's agent

Management

services

University

Students

Builder Admin Costs (legal

accounting, etc.) Land Owner

Manager Lease

$ Rent (collected by Manager on

behalf of University)

Alternative model (stage 1)



ME_132149621_1 (W2013)

3.2.2.1 Alternative model - GST consequences

Supply of student leases by the university

Under this arrangement, provided the rent charged to students is less than 75% of the GST inclusive

market value of the supply, the supply of accommodation by the university to the student will be GST-

free. Accordingly, the university will not be liable for GST on the leases supplied to the students.13

Furthermore, it will be entitled to full input tax credits for all costs it has incurred in relation to

developing the facility. For example, it will be entitled to a full credit for any GST incurred on the

acquisition of the land (assuming the margin scheme is not applied), a full credit for any GST on

building services acquired and a full credit for any GST on administrative services acquired.

Acquisition of management services

The acquisition of management services by the university from the manager will be a creditable

acquisition for the purposes of section 11-5 of the GST Act. As the university acquires these services

in the course of making GST-free supplies of accommodation to students or taxable commercial

residential premises during non-term time, the university will be entitled to claim input tax credits for

the GST payable on the management fee. As the manager is making taxable supplies to the

university, the manager will also be able to claim full credits for GST on all of its costs.

Outsourcing of management services by accommodation manager

In the event that the manager outsources some of its obligations to an unrelated external operator, for

example cleaning services may be outsourced, the supply of such services from the operator to the

manager will be a taxable supply. As the manager acquires the services in the course of making

taxable supplies of management services to the university, that is, for a creditable purpose, the

manager will also be entitled to an input tax credit for the GST payable on any fees paid to the

operator.

Using this alternative model, student accommodation is provided without any embedded GST costs

and there is no GST leakage for any party.

Alternative model - assignment of income stream instead of a lease premium

Finally, it is noted that the traditional model often involves the payment of a lease premium which the

manager believes it can recover through the efficient operation of the facility (i.e. effectively allowing

the university to realise the inherent economic value of its property).

13 Pursuant to subsection 38-250(1)(b)(i) of the GST Act.



ME_132149621_1 (W2013)

$ $ $

In the context of the alternative model, the same economic outcome can be achieved by the manager

(or securitisation vehicle) paying a lump sum fee to the university as consideration for the university's

agreement to assign to the manager some or all of the remaining rental stream (i.e. the rent after the

manager's fee has been deducted).

Noting that the upfront payment is essentially consideration for the assignment of the excess

consideration from the rental supply, and provided that it appropriately represents arm's length

consideration for entry into that arrangement, the assignment of the income stream should be a

financial supply that is not subject to GST. Importantly, it should not otherwise have a material

adverse impact on the input tax credit entitlements of either the university or the manager in relation

to the on-going operation of the facility. That is:

1. the costs incurred by the university in relation to the acquisition and development of the village

are directly related to its GST-free supply of leases to students (or taxable supplies of commercial

residential premises during term breaks); and

2. the costs incurred by the manager during the on-going operation of the facility relate to its taxable

supply of services to the university.

The university can, as a commercial matter, determine the scope and term of securitisation, which will

ultimately impact on the amount of upfront payment that can be realised.

This second step is diagrammatically represented as follows:

$ Rent (collected by

Manager on behalf of

University)

Enters lease as

Uni's agent

Lease

$ Premium

Net rental

proceeds

Management

Services

Alternative model (stage 2)

Students

University

Builder Land Owner

Admin Costs (legal

accounting, etc.)

Manager Manager or

securitisation vehicle

$ Management

Fee



ME_132149621_1 (W2013)

3.3 Conclusion

As highlighted above, student housing is one of those unique types of supplies that, depending on the

identity and characterisation of the supplier and the quantum of the consideration that is charged, can

potentially qualify for each of the three primary GST categorisations (i.e. taxable, GST-free and input

taxed). In an environment where there is a compelling policy argument that such accommodation

should be able to be provided without an embedded GST cost, it is incumbent on advisors to be

cognisant of these differing GST treatments depending on the commercial arrangements that are

implemented.



ME_132149621_1 (W2013)

4 Social housing

As noted in above, affordable housing is one of the biggest challenges faced by Australia today. As

rental prices continue to rise, so does the possibility that a growing proportion of Australia's most

vulnerable populations will be pushed out of the market entirely. Accordingly, the provision of social

housing has become increasingly important in recent times.

Social housing is a form of affordable rental housing usually provided by not-for-profit, non-

government, or government organisations to assist those facing barriers entering the private rental

market. Under section 38-250, GST-free treatment is available for certain organisations that provide

social housing.

The GST treatment of traditional arrangements in relation to the development and supply of social

housing can be illustrated in the following case study.14

4.1 When is a supply of social housing GST-free?

Similarly, to the situation outlined at paragraph 3.1 in relation to student housing, social housing will

be GST-free where the supply of accommodation is made by an endorsed charity, gift deductible

entity or government school and for consideration that is less than (in our experience most usually)

75% of the GST inclusive market value of the supply.

In most circumstances social housing is provided by dedicated charitable housing providers (CHP)

whose goal is to provide long-term accommodation solutions to its clients. Most, if not all, of these

CHPs are endorsed charities or not for profit bodies.

4.2 Case study – Social housing

The following case study illustrates the different GST outcomes that can arise using different delivery

models to effectively provide the same social housing solution. For the purposes of this case study

assume that:

1. a housing authority owns or will acquire land that can be used to develop (or be renovated into)

appropriate social housing product;

14 For the purposes of this case study we have assumed that all parties involved in the project are GST registered at all relevant

times, and the relevant charitable institution is eligible to access the GST-free concessions under section 38-250 of the GST

Act.



ME_132149621_1 (W2013)

2. the housing authority is registered for GST but is not an endorsed charity or not for profit

organisation;

3. a CHP is selected to manage this accommodation; and

4. the CHP is GST registered at all relevant times and is an endorsed charity and/or gift deductible

entity able to access the GST-free concession under section 38-250 of the GST Act.

4.2.1 Traditional model

While there are many variations on the models that have been used to deliver social housing

outcomes, in our experience the following outlines a common factual scenario that has been adopted

in situations where the underlying land is owned by the relevant government housing authority:

1. the housing authority will seek to appoint developers and builders to develop those premises;

2. the housing authority will seek to appoint CHP to manage the provision of social housing. To this

end, the housing authority will lease the properties to the CHP who will in turn sub-lease

individual residences to tenants – generally at a rent that is a significant discount to market (e.g.

less than 75% of market rent).

3. the CHP will effectively cover its costs under one of two scenarios:

the CHP will be entitled to charge a management fee to the housing authority (often deducted from

the rent collected from tenants); or

the rent charged on the lease of the property by the housing authority to the CHP is so low that the

rent derived from the tenants under the subleases effectively funds the CHP's activities.

The traditional model can be represented diagrammatically as follows:



ME_132149621_1 (W2013)

$ Purchase price (incl.

GST – assuming

taxable supply)

$ Build cost

(plus GST)

Lease

Lease

$ Costs (plus

GST)

GST GST GST

$ (input taxed – no GST)

$ (GST-free)

4.2.2 Traditional model - GST consequences

The GST treatment of the relevant supplies in a traditional model are as follows.

Traditional model

Tenants

CHP

Housing authority

Builder 3rd party service

providers Land owner

ATO



ME_132149621_1 (W2013)

Supplies by land owner, builder and third parties

The supplies to the housing authority by these parties will each prima facie be taxable supplies

(subject to GST). Under normal contractual arrangements the consideration paid or provided by the

housing authority to each relevant party will be 'grossed up' on account of the GST payable on these

supplies.

Supply of property by housing authority to CHP

As the housing authority is not an endorsed charity, it cannot access the GST concessions in

section 38-250. That is, this supply cannot qualify for GST-free treatment under section 35-250

because that section only applies to supplies made by:

1. endorsed charities;

2. gift-deductible entities; and

3. government schools.

Accordingly, as it will be supplying a lease of the residential premises to the charitable institution by

way of lease:15

1. its supply will be an input taxed supply of residential premises; and

2. it will not be eligible to claim input tax credits for GST it pays on expenditure related to the

acquisition of the associated land, building costs or administration costs.

Supply of leasing of housing by CHP to individuals

If the CHP is an endorsed charity and the supply of accommodation to tenants is for less than 75% of

the GST-inclusive market value of the supply, the supply of leases by the charitable institution to

tenants will be GST-free.16 If and to the extent that the leases by the CHP are GST-free, it should be

entitled to input tax credits for GST payable on acquisitions in relation to making these supplies.

Analysis of the GST consequences of the traditional model

Under the 'traditional' model as described above, a GST leakage will normally arise. Specifically, for

the reasons outlined above, the lease of the property (or properties) by the housing authority to the

15 Generally such leases are for terms well under 50 years and therefore do not qualify as long term leases (which would be

effectively be treated as a sale for GST purposes). If the lease does qualify as a long term lease (such that it is effectively

treated as a sale) then the GST consequences would be consistent with that outlined in in respect of a sale of property in

section 4.3 below. 16 Pursuant to section 38-250 of the GST Act.



ME_132149621_1 (W2013)

CHP by way of lease will normally be an input taxed supply. Accordingly, it will be denied the ability to

claim input tax credits for GST on its acquisitions pursuant to section 11-15(2)(a) of the GST Act.

It is acknowledged that the housing authority might argue that it should be entitled to some proportion

of input tax credits in relation to the development of social housing to recognise that its acquisitions do

not just relate to the supply of leased residential premises to the CHP, but are more broadly related to

activities involving the provision and promotion of social housing and community development.

While we have some sympathy for this argument in the context of the policy objectives supporting the

provision of social housing, following the Full Federal Court's decision in Rio Tinto Services Ltd v

Commissioner of Taxation [2015] FCA 94, it would seem unlikely that this would be upheld by the

courts. In this case, Rio Tinto Services sought to argue that it was entitled to at least a proportion of

credits for GST incurred on costs to provide housing to its employees by virtue of the fact that these

activities also had a relationship to the broader taxable mining enterprise.

In rejecting this argument, the effect of the statutory denial (or 'blockage') of credits in section 11-

15(2)(a) was described by the Full Federal Court as follows:

'The application of s 11-15(2)(a) requires, therefore, the precise identification of the relevant

acquisition and a factual inquiry into the relationship between that acquisition and the making

of supplies that would be input taxed. An acquisition will not be for a creditable purpose to the

extent that the facts disclose that the acquisition relates to the making by the enterprise of

supplies that would be input taxed. Some acquisitions may relate to the making of supplies

that would be capable of distinct and separate apportionment as between an input taxed

supply and an otherwise taxable supply. In that case it may be possible to divide the

creditable purpose between the two. Other acquisitions may be indifferently both for supplies

that would be both input taxed and otherwise taxable generally. In that case some fair and

reasonable assessment of the extent of the relationship between the two may need to be

made. But, as is the case here, an acquisition which relates wholly to the making of supplies

that would be input taxed is not to be apportioned merely because that supply may also serve

some broader commercial objective of the supplier. The contrary construction is neither

required by the language of the provisions nor by its policy. It may, indeed, readily be

assumed that many taxpayers will make supplies 'that would be input taxed' as part of

carrying on an enterprise. The construction urged by Rio Tinto, however, would prevent the

operation of s 11-15(2)(a) in such cases. The words of the section do not say that and the

policy of denying a credit for tax that would be input taxed militates against it. What the words

require is that there be a factual identification of the acquisitions in question and a factual

inquiry into the extent to which those acquisitions relate to the making of supplies that would

be input taxed. The relevant inquiry called for by s 11-15(2)(a) is not into the relationship

between the acquisition and the enterprise more broadly. An acquisition for purposes which

are not distinct and severable or which does not relate to different supplies but which comes

wholly within the blocking provision is excluded from the definition of creditable purpose.'



ME_132149621_1 (W2013)

Applying the above analysis to the 'traditional model' described above would leave very little room to

successfully argue for even a proportionate input tax credit entitlement to the housing authority. In any

event, even if Rio Tinto Services could somehow be distinguished it would only allow a proportion of

credits to be claimed in relation to the provision of social housing, meaning that in the context of the

traditional model, there will always be some level of embedded GST cost in relation to those supplies.

Accordingly, as a general proposition, some level of GST leakage will arise in respect of the traditional

model outlined above.

4.2.3 Alternative model

One of the commercial drivers of the traditional model is that the housing authority will generally seek

to retain ownership of the land and so, notwithstanding the lease to the CHP, is able to maintain a

degree of control of the ultimate use of land in the long term (e.g. if it believes the CHP is not

satisfying its obligations under the lease in relation to management or supply of affordable housing, so

that it has a right to terminate the lease and assume control of the properties).

For the reasons outlined above however, the traditional model will generally produce a level of GST

leakage that is otherwise inconsistent with the policy position that there should be no embedded GST

cost in relation to the supply of affordable (i.e. less than 75% of market rent) housing by endorsed

charitable entities.

In this context, set out below is a case study of an alternative structure involving a private investor that

produced an acceptable commercial position for the relevant housing authority in relation to its control

of the land, while allowing for a GST outcome consistent with the policy outlined above.

Contractual arrangements

The government land owner (GLO) owns existing residential stock that it is seeking to develop into

new affordable housing. It enters into an arrangement with a newly incorporated wholly owned

special purpose vehicle (SPV Co) under which:

1. the GLO grants access rights to SPV Co to allow it to enter the land to undertake the

development and operation of the properties upon completion. In consideration for these rights,

SPV Co will make development fee payments to the GLO during the operation phase of the

Project (Development Fee); and

2. SPV Co will undertake the project (i.e. operate and manage the affordable housing) in return for

service payments from the GLO (Service Fee).

SPV Co will engage the charitable housing provider (CHP), builder, facilities manager and all other

relevant subcontractors to carry out the project.

The GLO could provide land to the CHP for nil or nominal consideration either by way of:



ME_132149621_1 (W2013)

sale;

a long term lease (i.e. 50-years or more); or

a lease (e.g. up to 50 years).

The CHP will obtain control of the land either at the beginning or end of construction for each phase of

the development. Upon completion of construction, the CHP will lease the completed properties to

tenants for a rent that is less than 75% of market value. The CHP will normally be required to pay a

proportion of the rental stream from tenancies to the GLO as consideration for its transfer of the

properties (whether by way of sale, long term lease or lease).

Securitised funding structure

The private sector counterparty will establish a unit trust as a securitisation vehicle (SV).

1. The SV is capitalised with debt and equity (initially from the Sponsor).

2. The SV uses the funds to purchase receivables from the GLO, being the income stream

generated from Development Fees payable by SPV Co (Receivables). The purchase price is

equal to the net present value of the total 'Service Fees' payable during the Project.

3. The SV will utilise the Development Fees over the life of the project to:

service and repay any borrowed funds and interest thereon; and

provide returns on equity to its investors.

4.2.4 Alternative model – GST consequences

The GST treatment of the above arrangements is set out below.

Transfer of land by GLO Co to CHP

The GST treatment of the sale of the land by GLO to CHP is the key to the overall GST outcome that

arises from the arrangements. As noted above, this may be effected commercially either via:

1. a lease (less than 50 years);

2. by way of an outright sale of land; or

3. a long term lease (greater than 50 years).



ME_132149621_1 (W2013)

Lease of property by GLO to CHP (or sale prior to commencement of construction)

If the GLO leases the land to the CHP under a (less than 50 year) lease, then this will normally be an

input taxed supply of residential premises. For example, if the property comprised existing 'second

hand' residential premises and was leased to the CHP before development of the Project

commenced, it is likely that the transfer of property would be characterised as an input taxed lease of

residential premises under section 40-65 of the GST Act, and would therefore not be subject to GST.

Similarly, an outright sale of any existing 'old' residential premises prior to construction starting would

also likely be treated as an input taxed supply of residential premises under section 40-65 of the GST

Act.

Although no GST should be payable by the GLO in either case, it is likely that the GLO would be

denied input tax credits for some proportion of the costs it incurs in connection with the Project, in

particular, the GST on Service Fees payable over the term of the project. This could potentially

increase the project's overall net cost by up to 10%, impacting on the financial viability of the model.

Sale of property by GLO to CHP (after completion of construction)

If on the other hand the properties are transferred by the GLO to the CHP following completion of

construction, this will constitute a supply of 'new residential premises' for GST purposes. Accordingly,

the GLO would be liable for GST on any consideration provided by the CHP (which could be funded

from the rental stream received from tenants).

Importantly however, the CHP should be entitled to full input tax credits (on the basis that it makes

GST-free supplies of residential accommodation) so there should be no net GST cost to the GLO or

the CHP. Furthermore, transferring the land as a taxable supply should preserve the GLO's

entitlement to input tax credits on the Project Fees payable under the Project Deed.

Depending on exactly how the CHP funds this payment, there may need to be arrangements

implemented to address the attribution of GST on this supply (i.e. the GLO may have an 'up-front'

GST liability, triggering an up-front input tax credit entitlement to the CHP – which may require special

funding arrangements to the extent that the CHP otherwise pays for the transfer of the property by

way of transfer of the on-going rents received from tenants).

Outright sale of land with call option

As noted above, one of the key commercial drivers for the traditional structure is that GLOs and

housing authorities will often have a strong preference to retain legal ownership of the housing stock

(for a wide variety of reasons). As such, there is often a reluctance on the part of the GLO to transfer

ownership of the property to the CHP.

In the context of the present case study, one option for the GLO to maintain control over the

properties (for policy reasons or otherwise), is to sell the land to the CHP while at the same time



ME_132149621_1 (W2013)

having the parties agree for the grant of a call option from the CHP in favour of the GLO to allow the

GLO to re-acquire the properties from the CHP under certain circumstances (such as in the event the

CHP becomes insolvent or is otherwise failing to satisfy specified performance measures in relation to

the supply of affordable housing).

The grant of a call option is a separate supply to the supply of the underlying property the subject of

the option. However, the GST treatment of a call option generally follows the GST treatment of the

underlying supply the subject of the option. For example, the supply of the property by the CHP might

be a GST-free supply if the provisions of section 38-250 are satisfied, such that the call option should

also be GST-free under section 9-30(1). Alternatively, if not GST-free, the underlying supply of

properties by the CHP to the GLO would likely be input taxed, meaning that the call option would also

be input taxed under section 9-30(2). The parties may also agree to include a corresponding put

option in favour of the CHP, allowing the CHP to 'put' the property back to the GLO in certain

circumstances (for example if the CHP lost its charitable status or was being wound up).

Long term lease (>50 years)

The GST implications under a lease with a term of 50 years or more will generally be similar to an

outright sale (except in the case of a long-term lease granted before construction – see below for

further discussion). This is because, for GST purposes, a 'long-term lease' is treated in a similar

manner as a sale.

The GST Act defines 'long-term lease' as follows:

'long-term lease means a supply by way of lease, hire or licence (including a renewal or

extension of a lease, hire or licence) for at least 50 years if:

1. at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or

licence, it was reasonable to expect it would continue for at least 50 years; and

2. unless the supplier is an Australian government agency, the terms of the lease, hire or

licence, or the renewal or extension of the lease, hire or licence as they apply to the recipient

are substantially the same as those under which the supplier held the premises.'17

As with an outright sale, the timing of the granting of the lease will have different GST consequences

for the GLO, depending on the characteristics of the property (i.e. if the property comprises 'used'

residential premises prior to development, and whether the lease is granted before or after

construction).

17 Section 195-1 of the GST Act.



ME_132149621_1 (W2013)

As a broad proposition therefore, if the long term lease is granted after construction is completed, it

will be treated as a taxable supply of new residential premises by the GLO to the CHP, and the GLO

will be liable for GST on that supply (which should be fully creditable to the CHP).

Development fees payable to GLO

The GLO will be liable for (and will therefore charge) GST on any Development Fees as these would

be consideration for a taxable supply to SPV Co of a right to enter the land to carry out the

development activities. Any GST payable should be fully creditable to SPV Co (on the basis it is

acquiring access from the GLO in order to make a taxable supply of works to GLO) so no net GST

cost should arise for the GLO or SPV Co.

Securitised financing arrangement – Assignment of Development Fee

The assignment of 'Development Fee' receivables by the GLO to the SV should be an input taxed

financial supply of an interest in a debt under Item 2 of r. 40-5.09(3) of the GST Regulations.

Therefore, the GLO should have no GST liability in respect of any consideration provided by the SV.

However, an issue may arise as to whether this will affect the GLO's entitlement to input tax credits on

the fees payable to SPV Co.

In the present case, it is submitted that the better view is that the assignment of receivables by the

GLO should not adversely affect the GLO's input tax credit entitlement on the fees payable to SPV

Co. This is because the assignment of receivable is simply a means for the GLO to obtain financing

for the project and as such, the GLO would not be acquiring services from SPV Co for the purpose of

making an input taxed supply. In other words, there is arguably no direct nexus between the

acquisition of services from SPV Co (which relate to the on-going operation and management of the

affordable housing) and the assignment of receivables.

4.3 Conclusion

By selling or granting a long term lease of the completed development (together with an option

arrangement to ensure the parties commercial interests are protected) so that the land is effectively

transferred to the CHP by way of a taxable supply (that is fully creditable to the SPV) while

maintaining an ability to retain long term control / rights over that that land, it may be possible to

achieve a GST neutral outcome that is consistent with the underling policy intention that there should

be no embedded GST cost on the supply of affordable housing.



ME_132149621_1 (W2013)

GLO / Housing authority

SPV Co Securitisation

Vehicle

CHP

Tenants Builder Manager Investors

Sale/Lease

$ price/rent

Purchase Price Assign receivable to

Development Fee

$ $

Service Fee

Project Deed

Development Fee

Fee Fees

Access/Development

Rights

Lease $

rent

$ Services Return

$

Equity

$

Public

Private

Alternative arrangement



ME_132149621_1 (W2013)

5 GST and health care – some interesting

examples

Similar to the above examples, from a policy perspective, the provision of healthcare is broadly

accepted as a service that should be provided without any embedded GST cost. In this regard, in

every OECD country except New Zealand, GST/VAT concessions (or exemptions) apply to supplies

of certain health services.18

Again however, the drafting of these concessions can limit their scope, meaning that an unintentional

GST cost can arise in relation to services that are otherwise broadly accepted as being of a category

that should qualify for GST-free treatment. Alternatively, where supplies are made on a 'business to

business' basis, the parties may opt for ease of compliance over GST-free treatment.

Set out below is a summary of recent amendments made to the concessions that apply to health care

to ensure that they are appropriately applied, particularly in the case of multi-party arrangements

where one party would pay for provision of those services on behalf of another.

5.1 When is a supply of health services GST-free

Subdivision 38-B of the GST Act sets out the rules relating to the GST-free treatment of health

services. Relevantly, under section 38-10 of the GST Act, a supply of a health service is GST-free if

all of the following apply:

1. it is a service of a kind specified in the table in that subsection, or of a kind specified in the GST

Regulations;19 and

2. the supplier is a recognised professional in relation to the supply of services of that kind; and

3. the supply would generally be accepted, in the profession associated with supplying services of

that kind as being necessary for the appropriate treatment of the recipient of the supply.

Prior to 2012, the Commissioner generally considered that when health supplies were made under

multi-party arrangements, if:

1. a health care provider supplied GST-free health related services to a person (for example under

section 38-10 of the GST Act); and

18 OECD (2014), Consumption Tax Trends 2014, OECD Publishing. 19 A New Tax System (Goods and Services Tax) Regulations 1999 (Cth).



ME_132149621_1 (W2013)

2. the health care provider received a payment from an insurer or a government entity –

then no taxable supply was being made by the health care provider to the insurer or government

entity. Rather, following his view in GST public ruling GSTR 2006/9,20 the Commissioner would

generally take the view that a third party payment (for example by an insurer) to a health care provider

in relation to a supply to a patient, was consideration for the initial supply to the patient by the health

care provider.21 That is, the payment was treated as third party consideration for a GST-free supply

made by the health professional to his or her patient.

However, in the Full Federal Court case of Commissioner of Taxation v Secretary to the Department

of Transport (Victoria)22 (Department of Transport case), the Court was required to consider the

GST treatment of arrangements entered into by the Victorian Department of Transport with taxi

operators for the provision of subsidised taxi services to disabled passengers. Broadly, under the

arrangements the Department agreed to pay taxi operators 50% of the fare for transporting eligible

disabled passengers.

The Commissioner originally denied input tax credits to the Department, on the basis that he

considered that there was no taxable supply being made by the taxi operators to the Department, only

a single supply in each case of a supply of transport to the relevant passenger. However, the

majority23 disagreed with the Commissioner and held that:

'On the contrary, there were two supplies: the supply of transport to the MPTP Member and

the supply to the [Department of Transport] of the transport of the MPTP Member.'24

The majority considered that, on the basis that the acquisition of the supplies by the Department

otherwise satisfied section 11-5 of the GST Act, the Department was eligible for input tax credits in

relation to the second supply by the taxi operators to it.25

Following this decision, the Commissioner amended GSTR 2006/9 to clarify that the decision in the

Department of Transport case is an example of the proposition in GSTR 2006/9 that one set of

activities may constitute the making of two (or more) supplies.26

This revised view had a broader impact on the operation of the GST-free provisions dealing with the

provision of health care services. Effectively this meant that where health care services were

contractually acquired by a third party payer (e.g. an insurer or an employer), GST-free treatment did

not necessarily follow because the 'second' supply (to the insurer or employer) did not satisfy the

criteria to be GST-free (i.e. the services in this instances could not be recognised as appropriate

20 GSTR 2006/9: Goods and services tax: supplies. 21 See for example paragraphs 192A – 192H in GSTR 2006/9 (as at 1 July 2009). 22 [2010] FCAFC 84. 23 Kenny and Dodds-Streeton JJ; Jessup J dissenting. 24 [2010] FCAFC 84 at 56 (Kenny and Dodds-Streeton JJ). 25 Ibid 71. 26 GSTR 2006/9A3 – Addendum 'Goods and services tax: supplies' (as at 14 December 2011).



ME_132149621_1 (W2013)

treatment for the 'recipient of the supply'). Where insurers or employers were able to claim full input

tax credits, this did not introduce GST leakage. However, where an insurer or employer was not

entitled to full input tax credits (e.g. because it was not registered for GST, or carried on an enterprise

of that involved making input taxed supplies or due to any other specific provision in the GST Act)

then a GST cost arose.

5.1.1 Introduction of section 38-60 of the GST Act

Following the updated GST treatment following the Department of Transport case (as illustrated

above), Treasury noted that:

'This creates compliance issues and administrative costs for health care providers and

affected third parties as it requires them to account for a taxable supply when previously they

did not need to. These entities would also need to alter their arrangements and put systems in

place to account for GST on these supplies.'27

To address this issue, the Tax and Superannuation Laws Amendment (2012 Measures No.1) Act

2012 was subsequently introduced to insert 38-60 into the GST Act, with effect from 1 July 2012.28 In

the context of separate supplies made by health care providers to third party payers (such as

insurers), the Explanatory Memorandum to the Bill (EM) states that the changes to the GST Act

would:

'… ensure that a supply made by a health care provider to an insurer, a statutory

compensation scheme operator, a compulsory third party scheme operator or a government

entity, is treated as a GST-free supply to the extent that the underlying supply from the health

care provider to an individual is a GST-free health supply.'29

In this regard, section 38-60 of the GST Act generally provides that a supply of a service to:

1. an insurer in settling a claim under an insurance policy;

2. an operator of a statutory compensation scheme;

3. a CTP operator under a CTP scheme; or

4. an Australian government agency,

is GST-free to the extent that supply relates to a GST-free supply by the provider to an individual

under subdivision 38-B.

27 Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No.1) Bill 2012 [1.10]. 28 Except subsection 38-60(4), which also had effect prior to this date. 29 EM, page 3.



ME_132149621_1 (W2013)

Notwithstanding the above, the reforms recognised that in some cases, it would be administratively

simpler if the payments could be treated as being subject to GST.

Accordingly, subsection 38-60(4) of the GST Act provides that health care providers and the recipient

of the supply (i.e. the insurer, the statutory compensation scheme or CTP scheme operator, or the

Australian government agency) may agree to treat the supplies as taxable.

The EM states in this regard that:

'It is expected that providing this option will reduce compliance costs, with no adverse effects

to the individual receiving these goods and services. A similar mechanism currently exists in

relation to supplies of medical aids and appliances, and goods declared by the Health

Minister to be GST-free.'30

In practice, parties may elect to proceed on this basis where, for example, there is a combination of

GST-free and taxable supplies being made, and determining the amounts for each supply may be

complex and administratively difficult.

5.2 Case study – health services

The following case study illustrates the different GST outcomes that can arise depending on the

structure of the contractual arrangements between the parties. For the purposes of this case study

assume that:

1. a government authority engages a private operator to deliver health services to public patients;

2. the private operator delivers these health services directly to public patients at premises owned

and operated by the private operator;

3. the private operator also provides additional non-patient related services to the government

authority such as car parking facilities for the government authority's employees that are required

to visit the health centre on occasion;

4. the private operator charges the government authority a fee for both the provision of the health

care services and the provision of the car parking facilities; and

5. both the government authority and the private operator are registered for GST.

30 EM [1.20].



ME_132149621_1 (W2013)

5.2.1 Traditional model - provision of health services

The agreement between the government authority and the private operator will ordinarily provide for

the private operator to employ fully qualified personnel and adhere to strict service delivery standards.

In most circumstances the agreement between the parties will allow for payments to be made for both

the health services delivered to the patient and other non-patient related services, in this case study,

the availability of the car parking. In some circumstances the payments may be calculated as one

monthly lump sum or at least will allow for one tax invoice to be provided for all services provided by

the private operator in the month to be issued to the government authority.

5.2.1.1 Traditional model – GST consequences

Notwithstanding that there is one agreement covering the supplies made by the private operator to

the government authority there are two distinct supplies made under the agreement.

Supply of health services to patients

Whilst the supply by the private operator to the government authority is unlikely to be GST-free

pursuant to section 38-10(5) of the GST Act on the basis that the supply is not necessary for the

appropriate treatment of the recipient (i.e. the government authority), from 1 July 2012 the supply

should be GST-free pursuant to subsection 38-60(3) of the GST Act as:

a. the supply is a supply of a service to an Australian government agency; and

b. the service is the supplier making one or more supplies of services to an individual; and

c. at least one of the other supplies is wholly or partly GST-free under subdivision 38-B.

In this case study the private operator is making a supply of GST-free health services to the patient

and so paragraph b) and c) above should be satisfied.

Supply of car parking to employees of the government authority

The provision of the car parking facilities by the private operator to the government authority is not the

provision of health services that would be GST-free. On this basis this supply would be a taxable

supply by the private operator to the government authority. Whilst the government authority should

be entitled to an input tax credit for the GST incurred on the acquisition of the car parking the private

operator will be required to isolate the fee or otherwise apportion any lump sum fee, between the

GST-free health services and the taxable supply of car parking and issue a tax invoice accordingly.

Depending on the structure of the agreement between the parties and the calculation of the fees

payable for the various supplies this may create a compliance burden for the private operator.



ME_132149621_1 (W2013)

5.2.2 Alternative model – provision of health services

With similar facts to the above, the parties could simplify the GST compliance associated with the

arrangements by opting to tax all of the supplies made by the private operator under the agreement.

Subsection 38-60(4) of the GST Act provides that a supply of health services by the private operator

in these circumstances can be subject to GST notwithstanding section 38-60 of the GST Act if the

parties agree that the supply of the health services will not be treated as GST-free.

5.2.2.1 Alternative model – GST consequences

The consequence of an agreement between the parties to treat the supply of health services by the

private operator to the government authority as taxable means that both the supply of the health

services by the private operator and the supply of the car parking by the private operator will be

subject to GST. This will have implications for both parties. From the private operator's perspective

such a treatment will ease the administration burden associated with making two separate supplies

with different GST classifications under one agreement. From the government authority's

perspective, as it should be entitled to claim input tax credits for the GST that it incurs on the fee

charged by the private operator there should be no net additional cost in adopting this treatment.

However, depending on the terms of the agreement between the parties there may be a cash flow

implication that, like all things, will be a matter of negotiation.

5.3 Conclusion

The introduction of section 38-60 into the GST Act clarifies the GST treatment of supplies made by

health service providers to the classes of recipients in section 38-60 of the GST Act, in relation to a

supply of health care services to an individual. However, a careful analysis of the nature of the

supplies between all parties is required in order to ensure that an upstream supply to a recipient

described in section 38-60 of the GST is GST-free (unless the parties agree that the supply is taxable

under subsection 38-60(4) of the GST Act).

Rhys Guild and Jane Spencer

MinterEllison

September 2016

Documents

2016 National GST Intensive - Amazon S3 · 2016 National GST Intensive The tips and traps with little known exemptions Written by: Rhys Guild Partner MinterEllison Jane Spencer Special