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Subject: GST and the margin scheme

Question 1

Is the margin scheme applicable to an improved government piece of land that was converted from a reserve to freehold in 2002?

Answer

1. Yes, the margin scheme is applicable to an improved government piece of land that was converted from a reserve to freehold in 2002.

In this case, if the land was held before 1 July 2000 and there were improvements on the land as at 1 July then item 3 in the table in subsection 75-10(3) of the GST Act will apply and the valuation date is 1 July 2000.

However, if the land had no improvements as at 1 July 2000 but there are improvements subsequently made to the land before it is supplied; then the valuation date is the day on which the taxable supply takes place.

Question 2

If yes, is the valuation date 1 July 2000?

Answer

See answer to question 1.

Relevant facts and circumstances

A state department (you) is registered for the goods and services tax (GST).

You are selling a piece of land.

The piece of land was a reserve as at 1 July 2000 and was converted to freehold in 2002 and became your property.

The piece of land is part of an educational institution and the information below is provided by the educational institution.

The property is bounded by numerous residential properties and the fencing is the boundary fencing to these properties.

The fencing varies in ages and the fencing style ranges from chain wire to timber with condition ranging from poor to good.

A sewer line traverses the property. There is also a constructed storm water drain with maintenance hole traversing the property.

We are informed that the land is cleared and maintained and the property is regularly mowed by the educational institution. There has not been any building up of soil fertility; removal of animal pests, rabbit burrows, removal of rocks, stones or soil and filling of the land. The land will be sold for market value to a private company or individual.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1) and

Subsection 75-5(1A)

Reasons for decision

Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allows an entity to use the margin scheme in working out the amount of GST on a taxable supply of real property.

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land; selling a stratum unit; or granting or selling a long term lease; if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

In accordance with subsection 75-5(1A) of the GST Act, that agreement must be made on or before the making of the supply; or within such further period as the Commissioner allows.

In this case we are informed that:

· you are selling a piece of land;

· the piece of land was a reserve as at 1 July 2000 and was converted to freehold in 2002.

Therefore, you are allowed to use the margin scheme when you sell the land in question.

Goods and services tax ruling GSTR 2006/7 explains how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000.

Paragraphs 89-91 of GSTR 2006/7 have been reproduced below:

Commonwealth, a State or a Territory

89. Whether a supply is made by the Commonwealth, a State or a Territory is relevant for establishing which item in the table contained in subsection 75-10(3) applies to the supply. The item in the table then establishes the valuation date.

90. If the Commonwealth, State or Territory supplies land on which there are no improvements, the supply is GST-free under subsection 38-445(1) provided the land has not been previously supplied as a GST-free supply under this section.

91. If the land was held before 1 July 2000 and there were improvements on the land as at 1 July 2000, then the Commonwealth, a State or a Territory can choose to apply the margin scheme to calculate the GST payable on the supply. Item 3 in the table in subsection 75-10(3) applies in these circumstances. However, item 4 in the table in subsection 75-10(3) applies if the land has no improvements as at 1 July 2000 but there are improvements subsequently made to the land before it is supplied. The valuation of the land at the date of supply is undertaken, as if there were no improvements on the land at the date of supply.

Are there improvements on the land?

GSTR 2006/6 is relevant in determining whether or not there are improvements on the land for the purposes of Subdivision 38-N and Division 75 of the GST Act.

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.

23. 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. If any of the human interventions located on the land enhance its value at the relevant date, then there are improvements on the land. This is regardless of whether the net value of the human interventions enhances the overall value of the land.

24. Determining whether a human intervention enhances the value of the land entails an objective test. This means that whether an intervention enhances the value should not be determined by reference to use or intended use by either the supplier or the recipient.

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, stockyards, wells and bores, excavated tanks, dams, surface drains, culverts, bridges, sown pasture, 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;

· building up of soil fertility;

· removal of animal pests, rabbit burrows etc;

· removal of rocks, stones or soil; and

· filling of land.

Impact of deterioration on value of improvements

The issue of the impact of deterioration or degradation on improvements on land was recognised by the High Court in Lewis Kiddle and another v. Deputy Federal Commissioner of Land Tax 27 CLR 316. A methodology for calculating whether an improvement enhances the value of the land set out in that case has been reproduced in GSTR 2006/6 at paragraph 31:

31. The following High Court cases provide support for considering the impacts of deterioration or degradation:

Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 at 504:

While improvements or the consequent operations of nature are still going

on, the value of improvements may, of course, increase from year to year,

just as, in the case of some improvements, it may be exhausted

[emphasis added].

Lewis Kiddle and another v. Deputy Federal Commissioner of Land Tax 27 CLR 316 at 320 :

Presumably, a purchaser of land, if he considered this question at all, would determine that the amount to be attributed to value of improvements would be equal to the amount which he gained or saved by reason of the improvements having been made, he being thereby relieved from the necessity of making them. This amount would be found by ascertaining the amount which it would cost to make the improvements in question at the relevant date, including a proper allowance for loss of interest on all outlay during the period which must elapse before such outlay became fully productive, and by deducting from the sum so ascertained a proper allowance for depreciation or partial exhaustion of the improvements [emphasis added].

Therefore, GSTR 2006/6 indicates that not all human interventions are an improvement. In some circumstances, human interventions on land neither enhance nor decrease the value of land. The following paragraphs in GSTR 2006/6 relevantly state:

27. In some circumstances, a human intervention on land neither enhances nor decreases the value of land. For example, fire breaks, solely to allow access to fire equipment and reduce the spread of a fire, may not enhance the value of the particular land.

28. In other circumstances, human interventions that were once improvements but that have deteriorated over time or have contributed to land degradation, may no longer enhance the value of the land and are not improvements. For example, clearing is a human intervention which ordinarily enhances the value of the land. However, clearing may deteriorate over time with the regrowth of the same type of vegetation or even different vegetation (for example, lantana, blackberry or other noxious weeds). Clearing also may degrade the land by later causing erosion or salinity problems.

29. Similarly, a building that initially enhanced the value of the land may have deteriorated over time to such an extent that it is a detriment as it is uninhabitable and has been condemned by order of the local council is not considered to be an improvement.

30. In some situations, improvements may have been on the land but no longer exist as improvements on the relevant day specified in the table below. For example, bushland owned by the Commonwealth, a State or a Territory may have originally been fenced, but due to deterioration, no valuable fencing exists on the relevant day.

We have been advised that:

1. the piece of land was a reserve as at 1 July 2000 and was converted to freehold in 2002;

2. the property is bounded by nine residential properties and the fencing is the boundary fencing to these properties;

3. the fencing varies in ages and the fencing style ranges from chain wire to timber with condition ranging from poor to good;

4. a sewer line traverses the property; there is also a constructed storm water drain with maintenance hole traversing the property;

5. the land is cleared and maintained and the property is regularly mowed by the educational institution.

It is noted that the fencing varies in ages and the fencing style ranges from chain wire to timber with condition ranging from poor to good. It is also noted that a sewer line traverses the property; there is also a constructed storm water drain with maintenance hole traversing the property and the land is cleared, maintained and is regularly mowed by the educational institution.

Accordingly, on the facts provided we are of the view that there are improvements on the land.

Paragraph 91 of GSTR 2006/7 (see above) provides that if the land was held before 1 July 2000 and there were improvements on the land as at 1 July item 3 in the table in subsection 75-10(3) of the GST Act applies. Under those circumstances the valuation date is 1 July 2000.

Paragraph 91 of GSTR 2006/7 also provides that item 4 in the table in subsection 75-10(3) of the GST Act applies if the land has no improvements as at 1 July 2000 but there are improvements subsequently made to the land before it is supplied. Paragraph 91 of GSTR 2006/7 further mentions that under those circumstances the valuation of the land at the date of supply is undertaken, as if there were no improvements on the land at the date of supply.

Therefore, in this case, if the land was held before 1 July 2000 and there were improvements on the land as at 1 July then item 3 in the table in subsection 75-10(3) of the GST Act will apply and the valuation date is 1 July 2000.

However, if the land had no improvements as at 1 July 2000 but there are improvements subsequently made to the land before it is supplied; then the valuation date is the day on which the taxable supply takes place.

As the date of valuation can be found in question 1 we have not addressed question 2.

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