2016 National GST Intensive

Transcription

1 2016 National GST Intensive The tips and traps with little known exemptions Written by: Partner MinterEllison Hana Thorson Graduate MinterEllison Jane Spencer Special Counsel MinterEllison Presented by: Partner MinterEllison National Division 8 9 September 2016 Four Points by Sheraton, Sydney, MinterEllison

2 CONTENTS 1 Introduction Why is affordable accommodation important? Student accommodation When is a supply of student accommodation GST-free? Case study student housing Traditional Model outsourcing by way of lease Traditional model - GST consequences Alternative model Manager acts as University's agent Alternative model - GST consequences Conclusion Social housing When is a supply of social housing GST-free? Case study social housing Traditional model Traditional model - GST consequences Alternative model Alternative model GST consequences Conclusion GST and health care some interesting examples Introduction... Error! Bookmark not defined. 5.2 GST-free health services concessions... Error! Bookmark not defined Introduction of section of the GST Act... 28, MinterEllison

3 5.2.2 Section of the GST Act in practice Conclusion... 31, MinterEllison

4 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 operator 1. 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. 1 New Northern Beaches Hospital (see MinterEllison

5 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 cost 2. 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 paramedics 3 ; 2. the Sydney Morning Herald 4 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 Sun 5 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 Herald 6 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 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill Daily Telegraph, Prices put squeeze on crucial workers, Feb 27, November 21, 2015, Slim Pickings for renters in Sydney. 5 July 26, 2016 Lack of Housing hits society and the economy July 2015 Housing affordability crisis has essential works fleeing Sydney., MinterEllison

6 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 FCT 8 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 taxed 9. 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/ ECC Southbank Pty Ltd as trustee for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA For example, see edited private binding ruling which confirms that such supplies are input taxed pursuant to section of the GST Act., MinterEllison

7 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 (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)., MinterEllison

8 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 of the GST Act;, MinterEllison

9 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 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. Traditional model Land Owner $ Builder $ $ Admin Costs (legal accounting, etc.) University Lease $ Rent (+Premium?) Manager Lease $ Rent Students, MinterEllison

10 Traditional model - GST consequences Lease of the premises to the manager Under the traditional model, pursuant to section 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 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 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 inputs 11. 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 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., MinterEllison

11 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. Alternative model (stage 1) Land Owner Builder Admin Costs (legal accounting, etc.) $ $ $ University Management services Lease $ Management Fee Enters lease as Uni's agent Manager Students $ Rent (collected by Manager on behalf of University) 12 See public ruling GSTR 2000/37 and particularly paragraph 15., MinterEllison

12 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 GSTfree. 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 (1)(b)(i) of the GST Act., MinterEllison

13 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: Alternative model (stage 2) Land Owner Builder Admin Costs (legal accounting, etc.) $ $ $ Net rental proceeds University Management Services Manager or securitisation vehicle $ Premium $ Management Fee Lease Enters lease as Uni's agent Students Manager $ Rent (collected by Manager on behalf of University), MinterEllison

14 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., MinterEllison

15 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, nongovernment, or government organisations to assist those facing barriers entering the private rental market. Under section , 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 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 of the GST Act., MinterEllison

16 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 of the GST Act 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:, MinterEllison

17 ATO Traditional model GST GST GST Land owner Builder 3rd party service providers $ Purchase price (incl. GST assuming taxable supply) $ Build cost (plus GST) $ Costs (plus GST) Housing authority Lease $ (input taxed no GST) CHP Lease $ (GST-free) Tenants Traditional model - GST consequences The GST treatment of the relevant supplies in a traditional model are as follows., MinterEllison

18 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 That is, this supply cannot qualify for GST-free treatment under section 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: 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 of the GST Act., MinterEllison

19 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.', MinterEllison

20 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 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:, MinterEllison

21 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 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)., MinterEllison

22 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 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 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, MinterEllison

23 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 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 of the GST Act., MinterEllison

24 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 (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., MinterEllison

25 $ price/rent Sale/Lease Alternative arrangement GLO / Housing authority Purchase Price Assign receivable to Development Fee Service Fee Development Fee Project Deed $ $ Fee Fees Access/Development Public Rights Private CHP SPV Co Securitisation Vehicle $ rent Lease $ Services Return $ Equity Tenants Builder Manager Investors, MinterEllison

26 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 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 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)., MinterEllison

27 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 majority 23 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 Kenny and Dodds-Streeton JJ; Jessup J dissenting. 24 [2010] FCAFC 84 at 56 (Kenny and Dodds-Streeton JJ). 25 Ibid GSTR 2006/9A3 Addendum 'Goods and services tax: supplies' (as at 14 December 2011)., MinterEllison