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Ruling

Subject: Application of GST to supplies of residential vacant land by a government entity.

Question 1

Are the supplies of land by a government entity that are described as Class 1 Lots, in whole or in part, GST-free supplies under section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, supplies of freehold interest in residential land by a government entity that are described as Class 1 Lots are GST-free under section 38-445 of the GST Act, as land on which there are no improvements.

Question 2

Are the supplies of land by a government entity that are described as Class 2 Lots, in whole or in part, GST-free supplies under section 38-445 of the GST Act?

Answer

No, supplies of freehold interest in residential land by a government entity that are described as Class 2 Lots are supplies of land on which there are improvements. The supplies are not GST-free under section 38-445 of the GST Act. The supplies are subject to GST.

Question 3

If the land is not GST-free under section 38-445 of the GST Act (i.e. if the land is a Class 2 Lot), is a supply of the Lot a supply of land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act?

Answer

Yes. The Lots are land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act.

Relevant facts and circumstances

The government entity is a State Government Statutory Body established under an Act.

The government entity is registered for goods & services tax (GST).

Pursuant to the establishing Act, the government entity represents the State. Accordingly, a supply of land by the government entity will be a supply of land by 'the State' for the purposes of Subdivision 38-N and Division 75 of the GST Act.

Pursuant to the establishing Act, the government entity has the power to acquire unallocated State land by way of gazette notice.

The main purposes of the government entity include the facilitation of the following within declared Urban Development Areas (UDA):

Availability of land for urban purposes;

· Provision of a range of housing options to address diverse community needs;

· Provision of infrastructure for urban purposes;

· Planning principles that give effect to ecological sustainability and best practice urban design; and

· Provision of an ongoing availability of affordable housing options for low to moderate income households.

The scheme that is the subject of this ruling is described below. This description is based on the following documents. These documents, or the relevant parts of them, as the case may be, form part of and are to read with this description.

The application for a Private Ruling;

· A letter from the tax agent; and

· An aerial view of the land provided as Attachment B and a contour and detail survey map provided as Attachment C.

The government entity is to develop certain parcels of land in a township (the Land) which have been declared as a UDA by a Gazette Notice. The Land is currently held by another government entity.

The Land has been held by that other government entity since before 1 July 2000. The transfer of the Land will be by way of a machinery of government transfer through a Government Gazette Notice for no consideration.

The Land will be developed into a number of X Lots to be sold for consideration for the construction of a diverse range of dwellings, including dwellings which are affordable to low to moderate income households (in line with its powers under the Act).

The Land is adjacent to a residential property development and some sporting fields. There are currently no permanent structures on the Land. The only identifiable 'features' of the Land are:

· Dirt tracks which have been created naturally (through wear) as a result of use of the land by the adjoining landowners;

· Two drainage channels, which have been formed naturally as a result of soil erosion from stormwater discharge from town drainage infrastructure; and

· A single power line that crosses the Land from east to west (which will be removed well before the date the Land is supplied); and

· Two small unauthorised dams that have been constructed on the properties (or more correctly, one dam on the property and one that slightly encroaches across the boundary from the adjacent landowner's property).

Prior to the individual Lots being made available for sale, the government entity will undertake certain works on the Land, including:

· the construction of roads within the estate,

· the installation of water supplies;

· the installation of power supplies;

· the construction of sewerage networks

Following the development, all Lots will be vacant residential land with water, sewerage and electricity connection points available outside the boundaries of the Lots.

You have classified the Lots into two distinct classes for the purposes of this application, namely 'Class 1 and 'Class 2'.

Class 1 Lots

Class 1 land includes all Lots that possess the following characteristics:

· The only identifiable features on the Lot are the dirt tracks, the dams and/or the drainage channels (if any);

· There are no power poles installed on the Lot (even if power lines occupy part of the space above the property);

· There have been no development works undertaken on the Lot (even if the development of adjacent land has enhanced the value of the Lot); and

· There have been no clearing works undertaken on the Lot.

During the development of the larger original estate, no development activity occurred within the boundaries of the land that is referred to as Class 1 Lots.

Class 2 Lots

Class 2 land includes all Lots that possess the following characteristics:

· The only identifiable features that existed on the Lot as at 1 July 2000 were the dirt tracks, the dams and/or the drainage channels (if any); and

· Development works and/or clearing works have been undertaken on these Lots during the development activity after 1 July 2000.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 Section 38-445

A New Tax System (Goods and Services Tax) Act 1999 Division 75

A New Tax System (Goods and Services Tax) Act 1999 Section 75-10

Reasons for decision

Question 1

Are the supplies of land by the government entity described as Class 1 Lots, in whole or in part, GST-free supplies under section 38-445 of the GST Act?

Summary

Supplies of freehold interests in residential land, being that part of the X land that became class 1 Lots, are GST-free under section 38-445 of the GST Act, as land on which there are no improvements.

Detailed reasoning

The application deals with transactions of real property.

Real property is defined for GST purposes under Section 195-1 as including:

· any interest in or right over land; or

· a personal right to call for or be granted any interest in or right over land; or

· a licence to occupy land or any other contractual right exercisable over or in relation to land.

Land is defined in the Acts Interpretation Act 1901 under subsection 22(1) as follows:

(c) Land shall include messuages tenements and hereditaments, corporeal and incorporeal, of any tenure or description, and whatever may be the estate or interest therein;

Estate is defined as:

(d) Estate shall include any estate or interest charge right title claim demand lien or incumbrance at law or in equity;

Essentially, the supplies under consideration are bundles of recognisable, enforceable legal rights relating to land. In particular, supplies of freehold interests in land subdivided from a larger area being those estates that are defined in the facts as Class 1 and Class 2 Lots.

Whether a supply is taxable, GST-free or input taxed will be determined on whether the supply satisfies the core provisions under Division 9, but is GST-free under Division 38, or input taxed under Division 40.

Freehold title to the Lots developed by a government entity will be supplied for consideration for the construction of a diverse range of dwellings for individuals. The supplies will be made in the course or furtherance of the enterprise that the government entity carries on. The supplies are connected with Australia because the land is situated in Australia. The government entity will be registered at the time the supplies are made. The supplies will satisfy the positive requirements of section 9-5 of the GST Act.

Subdivision 38-N - Grants of land by governments

Section 38-445 of the GST Act relevantly provides that a supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if the supply is of a freehold interest in the land. However, the supply is not GST-free if, since 1 July 2000, the land has already been the subject of a supply that is GST-free under this section.

The Land is being acquired after 1 July 2000 from another government entity that held the Land as at 1 July 2000. However, that supply of land will be by way of a machinery of government transfer through a Government Gazette Notice. Because the supply is not made for consideration, the supply will not be made as a GST-free supply under section 38-445 of the GST Act.

Goods and Services Tax Ruling GSTR 2006/6: Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75 (GSTR 2006/6) provides clarification on the meaning of the phrase 'land on which there are no improvements' under Subdivision 38-N of the GST Act and the phrase 'improvements on the land or premises in question' under Division 75 of the GST Act.

The relevant ATO views in GSTR 2006/6 and their application to the facts of the ruling are as follows:

Paragraph 20: Unimproved land is taken to be land in its natural state… the land is compared with land in its natural state. This requires the land being supplied to be considered in its physical state at the time of its supply.

Class 1 Lots have no development works on them and could be favourably compared to land in its natural state.

Paragraph 21: The meaning of 'improvements' in the context of land tax has been held by the High Court in Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503 to be:

'Any operation of man on land which has the effect of enhancing its value comes within the definition of 'improvement'.

Class 1 Lots have not had any development work carried out within the area of the Lot that would serve to provide an enhancement of value.

Paragraph 22: …for there to be improvements on the land: there must have been some human intervention on the land; the human intervention must have been physically on the land; and that human intervention must enhance the value of the land at the relevant date for ascertaining whether there are improvements on the land.

Class 1 Lots must have had human intervention amounting to an improvement on the Lot for it to be considered to be land on which there are improvements.

Paragraph 28: …human interventions that were once improvements but have deteriorated over time…may no longer enhance the value of the land and are not improvements. Any land that was improved land can become unimproved land.

The status of the Class 1 Lots as improved or unimproved land is determined at the time the Lot is supplied. Until that time the Land may be either improved or unimproved land depending on its physical state. The Class 1 Lots will be supplied following the development and approved subdivision of the Land.

Paragraph 30: In some situations, improvements may have been on the land but no longer exist as improvements on the relevant day [time of supply].

The subdivision of the improved X Land results in the development works being only on the Class 2 Lots and other land, but no development works on the Class 1 Lots. The Class 1 Lots are therefore land on which there are no improvements at the time of their supply.

Paragraph 34: The relevant day for ascertaining whether there are improvements on land….subsection 38-445(1): when the supply is made.

Class 1 Lots are not land on which there are improvements if, at the time of their supply, they evidence none of the development work undertaken when they formed part of the englobo Land.

Paragraph 47: improvements on the land do not include interventions that are not upon the land …

Class 1 Lots are not land on which there are improvements for purposes of section 38-445 of the GST Act despite surrounding Land being developed land (including Class 2 Lots) that enhances the value of a Class 1 Lot.

Conclusion

Development works must have been undertaken within the boundary of a Class 1 Lot for that Lot to be treated, at the time it is supplied, as land on which there are improvements.

The subdivision of 'improved land' can result in a subdivided Lot that is land on which there are no improvements.

Because no activity has occurred on the Land that became Class 1 Lots during the development of the larger original estate, or thereafter, Class 1 Lots are land on which there are no improvements. The application of subsection 38-445(1) of the GST Act to the facts of this ruling means a supply of a Class 1 Lot is a GST-free supply.

Question 2

Are the supplies of land by a government entity that are described as Class 2 Lots, in whole or in part, GST-free supplies under section 38-445 of the GST Act?

Summary

No, the supplies of freehold interest in residential land by the government entity that are described as Class 2 Lots are supplies of land on which there are improvements. The supplies are not GST-free under section 38-445 of the GST Act and, accordingly; these supplies are subject to GST.

Detailed reasoning

A supply by the Commonwealth, a State or a Territory of a freehold interest in land on which there are improvements is not GST-free under section 38-445 of the GST Act.

The relevant ATO view in GSTR 2006/6 and its application to the facts of this ruling is as follows:

Paragraph 22: …for there to be improvements on the land: there must have been some human intervention on the land; the human intervention must have been physically on the land; and that human intervention must enhance the value of the land at the relevant date for ascertaining whether there are improvements on the land.

Class 2 Lots must have had human intervention amounting to an improvement on the Lot for it to be considered as land on which there are improvements.

Because development works including clearing have been undertaken on the Lots during the development activity (since 1 July 2000) the Lots are considered to be land on which there are improvements for purposes of section 38-445 of the GST Act.

Paragraph 25: … examples of human interventions that may enhance the value of land:

· fencing - internal or boundary fencing;

· utilities, for example, water, electricity, gas, sewerage connected or available for connection;

· clearing of timber, scrub or other vegetation;

· excavation, grading or levelling of land;

· drainage of land;

· building up of soil fertility;

· removal of animal pests, rabbit burrows etc;

· removal of rocks, stones or soil; and

· filling of land.

Class 2 Lots have had some of these human interventions, amounting to improvements on the land, carried out within the boundaries of the land encompassing the Lot.

Conclusion

Development works to the original larger interest have been undertaken within the boundaries of the Class 2 Lots. These Lots will be treated at the time of supply as land on which there are improvements.

The application of subsection 38-445(1) of the GST Act to the facts of this ruling means a supply of a Class 2 Lot is not a GST-free supply.

Question 3

If the land is not GST-free under section 38-445 of the GST Act (i.e. if the land is a Class 2 Lot), is a supply of the Lot a supply of land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act?

Summary

Yes. The Class 2 Lots are land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act. The margin on which GST will be payable is the amount of the consideration received less the valuation of the land on the day on which the taxable supply takes place as if there are no improvements on the land or premises on that day.

Detailed reasoning

Division 75 allows you to use a margin scheme to bring within the GST system your taxable supplies of freehold interests in land. If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.

If subsection 75-10(3) of the GST Act applies to your supply, the margin for the supply is the amount by which the consideration for the supply exceeds a particular valuation of the interest.

Item 4 of subsection 75-10(3) of the GST Act applies where the supplier is the Commonwealth, a State or a Territory, and the interest has been held since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000. The relevant valuation under Item 4, in determining the margin, is the valuation of the land on the day on which the taxable supply takes place.

Subsection 75-10(3A) of the GST Act provides that if there are improvements on the land in question on the day of supply, the valuation is to be made as if there are no improvements on the land or premises on that day.

GSTR 2006/6 provides clarification on the meaning of the phrase 'improvements on the land or premises in question' and the application of Division 75 of the GST Act to the facts of this ruling.

Paragraphs 48 to 51 of GSTR 2006/6 contain the following:

Subdivided land and item 4 of the table in subsection 75-10(3)

48. In this part of the Ruling, the Commissioner considers whether a supply of a particular subdivided lot is ineligible for consideration under item 4 of subsection 75-10(3) because the larger area (X land) from which it was subdivided had improvements on it at 1 July 2000, even though the physical area of the particular subdivided lot had no improvements.

49. The issue is whether it is necessary to consider whether any part of the X land had improvements on it or whether regard should be had only to that part of the X land that forms the subdivided lot.

50. It is the Commissioner's view that the words 'land or premises in question' in item 4 qualify the application of the improvements test to land that is supplied and not the larger area from which it is subdivided.

51. These words can be contrasted with the expression 'interest, unit or lease' which are used elsewhere in the item to refer to the legal interest being supplied under the margin scheme. This distinction supports the view that it is the physical land rather than the legal interest that is considered when determining whether there were improvements on the land at the relevant date.

Unlike Items 3 and 4 in the table in subsection 75-10(3) of the GST Act, section 38-445 of the GST Act does not contain the qualification 'land or premises in question'. Section 38-445 instead refers to 'land on which there are no improvements'.

The land held prior to July 2000 was the X land. This land had to be developed before the subdivision of the land could be completed. In Brisbane City Council v. Valuer-General (Queensland) [1978] HCA 40, 140 CLR 41, 21 ALR 607, Gibbs J, with whom all puisne Judges agreed, noted at HCA 47:

These provisions [the Land Acts, 1962 (Q.), as amended] make it necessary to determine for valuation purposes, whether the land in question is improved or unimproved. They also indicate what tests should be applied in deciding what is an improvement for the purposes of the valuation. In the first place, an improvement in relation to land must be "thereon or appertaining thereto". This means that the improvements, if not on the land, must be "such as are in the strict legal sense 'appurtenant' to the property and incident to its ownership" (McDonald v. Deputy Federal Commissioner of Land Tax (NSW) (1915) 20 CLR 231, at pp 234-235). Secondly, something done on or appertaining to land which reduces rather than enhances its value is not an improvement for the purposes of the Act, any more than it would be in the ordinary sense of the word. In Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498, at p 503, Griffith C.J. said, in a passage which has frequently been cited: "Any operation of man on land which has the effect of enhancing its value comes within the definition of 'improvement'."

Improvement also refers to any operation upon the land which makes the use of the land more efficient (see: Dampier Mining Co Ltd v. FCT (1979) 10 ATR 193; (1979) 27 ALR 579).

As at 1 July 2000, the Land was held by the State. The Land was and still is adjacent to a residential property development and some sporting fields. There are currently no permanent structures on the Land. The only identifiable 'features' of the Land are:

· Dirt tracks which have to been created naturally (through wear) as a result of use of the Land by the adjoining landowners;

· Two drainage channels, which have been formed naturally as a result of soil erosion from stormwater discharge from town drainage infrastructure;

· A single power line that crosses the Land from east to west (which will be removed well before the date the Land is supplied by the entity); and

· Two small unauthorised dams that have been constructed on the properties (or more correctly, one dam on the property and one that slightly encroaches across the boundary from the adjacent landowners' property).

The test of whether there were improvements on the Land as at 1 July 2000 is provided in paragraph 21 of GSTR 2006/6 as:

· 'Any operation of man on land which has the effect of enhancing its value comes within the definition of 'improvement'

Generally, easements, restrictive covenants and encroachments would not be considered improvements where they do not have the effect of enhancing the value of the land.

The dirt tracks and unauthorised dams have resulted from unauthorised entry upon the Land the property of the State. In Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503 Griffith CJ stated

'… the term "value of improvements" is defined to mean "the added value which the improvements give to the land at the date of valuation irrespective of the cost of the improvements." It seems plain enough that that means that the value of improvements is the present enhancement of the value of the land attributable to the operations of man upon the land the benefit of which still continues, including also in some cases improvements not actually effected upon the land itself, to which qualification it is not necessary to refer for present purposes.

What operations of man are improvements? When I say "operations of man," I think the term should be limited to what is done by the owner for the time being, … '

The drainage channels, which have been formed naturally, are not caused by the operation of man, particularly not by the owners of the Land.

The power line easement is to be removed and the power supply to the Land relocated. We accept that the current power lines and easements do not add value to the Land.

Conclusion

In our view, none of the above features existing as at 1 July 2000 are improvements on the Land for purposes of item 4 of subsection 75-10(3) of the GST Act. Accordingly, the Lots are land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act.

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