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GST Q&A – GST on payments in lieu of infrastructure works

Does GST apply to payments that a developer makes to a Council in lieu of the developer being required to complete infrastructure works?

Question

The Council has entered into an arrangement whereby a developer will pay to Council an agreed amount in lieu of being required to complete infrastructure works. Under the arrangement, Council will apply this payment to the cost of performing specific infrastructure works in the future, with approved grant funding also contributing to the costs. Council is querying whether GST should apply to this arrangement, noting that the contract between Council and the developer states that GST will apply.

Under usual circumstances the developer would incur the costs of infrastructure works itself and seek an infrastructure offset with Council, in which case no GST is applied to the offset. Does the nature of this arrangement change the GST treatment?

Answer

Generally, where a developer is required to undertake infrastructure works in order to gain development approval from a council, the infrastructure contribution will not constitute consideration for a taxable supply (and, therefore, will not be subject to GST) due to the application of Division 81 of the GST Act.

In relation to your specific circumstances, we refer to the ATO’s class ruling CR 2013/13, which sets out the ATO’s view regarding the treatment of ‘developer contributions’, including references in paragraphs 15 to 32 to the various legislative bases that allow a council to impose a ‘developer contribution’, either in cash or in kind.

Whilst we note that this is a Class Ruling and therefore states that it only applies to the specific class of entities list (namely, councils that are members of the Local Government Association of NSW and Shires Association of NSW), the ruling provides guidance to other entities on the interpretation of the relevant law. Therefore, if the local government rules that apply in your council are the same, or have the same effect, as those considered in the class ruling, then the interpretation provided by the ruling should have similar application to your council.

The ATO’s view, as outlined in paragraphs 36 and 39 of CR 2013/13 is that a developer contribution that is made in relation to the provision of a development consent that is consistent with the local/state legislative provisions will be exempt from GST due to the application of Division 81, regardless of whether the contribution is made in kind or in cash.

Accordingly, assuming the agreement between Council and the developer is consistent with the local/state legislative provisions in relation to development consents, then the payment would be capable of being GST-exempt under Division 81.