GST, Infrastructure Charges and Developer Contributions

The comments in this article are based on a Q&A posed by one of our members. For context, the question is reproduced below:

“Council has entered into an agreement with a developer whereby, as a condition of the development approval, the developer transferred a portion of land to Council for a connection road. The agreed value of the land will be held as Infrastructure credits. Council will offset the value of any infrastructure charges payable by the developer for the development and refund any balance left in cash. Can you please advise of any GST implications.”

– TaxEd Member

The above question refers to various rules in the GST law. However, the most relevant provisions are found in Divisions 81 and 82.

Division 81 Generally

Division 81 deals with the GST treatment of the payment of Australian taxes, fees and charges. Generally, a fee or charge that relates to (or relates to an application for) the provision, retention, or amendment of a permission, exemption, authority or licence under an Australian law, is excluded from the scope of the GST regime. It does this by treating such payments as not being the provision of consideration. However, some fees and charges will be treated as consideration and therefore subject to GST, and this is done via the GST Regulations.

In the context of a local Council providing a Developer with approval to develop land, any charges imposed by Council (i.e., infrastructure charges), and to be paid by the Developer as monetary consideration, would generally be covered by Division 81 and would not generally be subject to GST.

Division 82 Generally

Division 82 was introduced to expressly deal with situations where a Developer may make an in-kind developer contribution to an Australian government agency (such as a local Council) in return for the supply of a right to develop land. The Explanatory Memorandum that introduced Division 82 summarises the operation of the division as follows (emphasis as underlined):

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

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

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

In the context of a local Council providing a Developer with approval to develop land, any charges imposed by Council (i.e., infrastructure charges), and to be paid by the Developer via an in kind developer contribution, would generally be covered by Division 82. As such, the charges imposed by Council would not be subject to GST, and the in kind supply made by the Developer to Council would also not be subject to GST.

Comments

The question raised, however, goes further and identifies a few items that require clarification.

Firstly, we have assumed that the supply from Council to the Developer is the right to develop the land for which the Developer is transferring the portion of land to Council. The supply by Council would not be subject to GST under Division 82.

Secondly, the Developer is making a supply of land to Council in return for Council making a supply in return of the right to develop the land. Again, this supply would be covered by Division 82 and would not be subject to GST.

Thirdly, throughout the development, the Developer would generally incur infrastructure charges. However, as the Developer has provided the in kind contribution to Council, it appears that Council will not be imposing such charges on the Developer. Instead, Council will monitor the extent to which the Developer incurs such infrastructure charges, and Council will track the value of such infrastructure charges against the market value of the land supplied. This appears to be an internal process of Council and does not appear to result in Council making any supply or acquisition.

Fourthly, we note that even if Council did impose the infrastructure charges on the Developer, such charges would be covered by Division 81 and would not be subject to GST.

Fifthly, if the total infrastructure charges incurred throughout the development are more than the value of the in kind land supplied, Council would seek an additional payment from the Developer. Such payment would be covered by Division 81, and would not be subject to GST.

Sixthly, if the total infrastructure charges incurred throughout the development are less than the value of the in kind land supplied, Council intends to pay this difference to the Developer. Based on the above GST treatments for the various transactions, it would not be unreasonable to expect that the payment would also not be subject to GST. However, this payment does not appear to be expressly covered by the ambit of Division 82. The question is therefore: Is the Council payment made in return for a supply made by the Developer to Council?. If so, is the payment consideration for a taxable supply?

We note the ATO makes the following comments in CR 2013/13:

36. Developer contributions (either monetary or in kind) imposed on or after 1 July 2013 in relation to the provision of a development consent are exempt because of subsection 81-10(1) and subsection 81-10(4). They are alternatively exempt under section 81-15 by virtue of paragraph 81-15.01(1)(f) of the GST Regulations…’ .

…

67. As a fee or a charge, a developer contribution is of a kind covered by subsection 81-10(4) if the contribution relates to (or relates to an application for), the provision, retention, or amendment, under an Australian law of, amongst other things, a permission (however described).

With regard to the infrastructure works, the GST treatment will depend on the terms and conditions of the arrangement between Council and the Developer. However, we note that the relevant provisions in Division 82 is as stated below:

Section 82-5

(1) The supply, by an Australian government agency, of a right to develop land is not treated as consideration for another supply if the other supply complies with requirements imposed by or under an Australian law.

(2) It does not matter whether the other supply made is made to the Australian government agency.

The provisions in Division 82 appear to be confined to Council (an Australian government agency) making a supply of granting the rights to develop land, and do not appear to extend to, or deal with, the situation where Council may also provide a payment to a Developer for works. We further note that it is only the ‘right to develop’ supplied by Council that is not treated as consideration.

We also refer to the ATO comments in CR 2013/13, notably paragraphs 90 to 98, where there is only reference to in kind contributions in the context of Division 82. Based on this, it would appear that Division 82 does not extend to treat any payment made by Council as not being consideration and there is a risk that to the extent Council is making a cash payment this would be consideration provided in return for a supply made by the Developer. Notwithstanding this, where such a payment is treated as consideration (or an adjustment to consideration) for the supply of the land or an adjustment to the infrastructure fees and charges, and those supplies are all outside the scope of the GST regime, it would be argued that GST should not apply to the payment made by the Council.

Ultimately, as Council and the Developer would both be GST-registered and generally entitled to claim full GST credits, whether the above transactions are subject to GST or not, the position for Council and the Developer should be GST neutral. However, both parties should review the terms of the arrangement (including any written agreements) to determine which supplies are subject to GST and which are not, so that GST is applied appropriately and valid tax invoices can be issued.

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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.