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Ruling

Subject: GST and valuation for margin scheme purposes

Question

What is the relevant date of valuation for the purpose of calculating the margin in the purchase of Government owned vacant land?

Answer

If there were no improvements on the land as at 1 July 2000, the relevant date of valuation for the purpose of calculating the margin in the purchase of Government owned vacant land is the day on which the taxable supply takes place.

Relevant facts and circumstances

You purchased a vacant land post 1 July 2000.

The vacant land was owned by a government owned entity prior to 1 July 2000.

Both parties were registered for the goods and services tax (GST) at the time of the settlement.

Both parties agreed in writing to apply the margin scheme to the sale.

During the ownership of the vacant land by the government owned entity, a number of improvements were made to the land

You have provided a copy of a valuation report. The report states that none of the human interventions/improvements have added value to the property and concluded that they have not added value individually or collectively as at 30 June 2000. The improvements are minor and not of any consequence when considering the value of the property, regardless of present or future use of the property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(3).

Reasons for decision

Item 4 of the table in subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that valuations may be used to work out margins for the purposes of the Margin Scheme if the supplier is the Commonwealth, a State or a Territory and has held the interest, unit or lease since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000.

The Commissioner of Taxation has provided clarification on the meaning of the phrase 'no improvements on the land' in Goods and Services Tax Ruling 2006/6 (GSTR 2006/6): improvements on the land for the purposes of Subdivision 38-N and Division 75.

The following is mentioned in GSTR 2006/6 in regards to 'improvements'.

The meaning of 'improvements on the land'

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'.

22. Applying this principle means that, for there to be 'improvements on the land':

· there must have been some human intervention;

· the human intervention must have been physically located 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 land.

Paragraph 25 of GSTR 2006/6 provides a list of examples of human intervention which may enhance the value of land and thus be considered improvements. It states the following:

Human interventions

25. The following are examples of human interventions that may enhance the value of land:

· houses, town-houses, stratum units, separate garages, sheds and other out-buildings;

· commercial and industrial premises;

· farm houses, farm outbuildings, internal fencing…formed internal roads, and irrigation layouts;

· formed driveways, swimming pools, tennis courts, and walls;

· any other similar buildings or structures;

· 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;

· removal of rocks, stones or soil; and

· filling of land.

In your case, there had been a number of human interventions on the vacant land as at 1 July 2000.

Paragraph 23 of GSTR 2006/6 provides that where there have been a number of human interventions on the land it is necessary to establish whether any of the human interventions enhance the value of the land at the relevant date. If any of the human interventions on the land enhances its value at the relevant date, then there are improvements on the land. Whether the net value of the human interventions enhances the overall value of the land is irrelevant.

GSTR 2006/6 also provided guidance on who establishes whether there are improvements on the land as below:

35. Determining, whether a human intervention enhances the value of the land is an objective test. This means that whether an intervention enhances the value of the land should not be determined by reference to use or intended use by either the supplier or the recipient. For example, real property with a building on it that is not condemned, enhances the value of the land even though the recipient may intend to demolish the building and construct some other building in its place.

36. As the issue of whether there are improvements on the land is a question of fact, it may be prudent to engage a professional valuer to establish this.

In this case, your valuer has concluded that the human interventions/improvements have not added value to the property individually or collectively as at 1 July 2000. The improvements are minor and not of any consequence when considering the value of the property, regardless of present or future use of the property.

Therefore based on the information you have supplied, it is considered that there were no improvements on the land as at 1 July 2000 through these human interventions on the land.

Accordingly, on the facts provided, we are of the view that there were no improvements on the land for the purpose of item 4 of the table in subsection 75-10(3) of the GST Act. Therefore the relevant date of valuation for the purpose of calculating the margin scheme in the purchase of the vacant land is the day on which the taxable supply takes place.

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