Edited version of your private ruling

Authorisation Number: 1012407899416

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Ruling

Subject: GST and purchase of property

Question

Will you, ABC Limited as Trustee for ABC Trust, or a relevant Permitted Purchaser be making a creditable acquisition of the property located at a specified address (the Property) or parts of the Property under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where the purchase is made from XYZ vendor as Corporation Sole?

Answer

Yes, you or the relevant Permitted Purchaser will be making a creditable acquisition of the Property or parts of the Property where all the requirements under section 11-5 of the GST Act are satisfied.

The GST-free provision in subsection 38-445(1) is unlikely to apply to the supply as we consider the relevant land is not land on which there are no improvements.

Relevant facts and circumstances

You are applying for this ruling as the purchaser of a property. ABC Holdings Limited is the representative member of the GST group of which you are a member.

The documents you have provided specify 'ABC Limited as responsible entity of the ABC Trust'. You have clarified that the term 'responsible entity' refers to ABC Limited in its capacity as trustee for ABC Trust.

The property you are purchasing is located at the specified address (the Property).

XYZ vendor as Corporation Sole (the Owner) is the legal and beneficial owner of the Property, known as:

· Lots A and B, and

· the land described as proposed lots C and D in the Indicative Plan.

For the purpose of this ruling:

· Lot B is referred to as the B Land , and

· the remainder of the Property is referred to as the Remaining Land.

You have provided the following documents:

1) Signed copy of the Irrevocable offer and put option deed (the Option Deed) dated 2 years ago.

2) Indicative Plan

3) Unsigned copy of Contract for the sale of land - 2005 edition in draft format and with certain particulars incomplete (the Draft Contract)

4) Aerial photograph of the particular town centre and immediate surrounds

5) Aerial photograph of the particular regional centre "Overflow Car Park" (the B Land) taken 2 years ago.

6) Site photographs

Definitions in the Option Deed include the following:

Overflow Carpark:

that part of the Property used as a carpark and identified in the plan attached in Attachment 17.

Permitted Purchaser:

each of:

1. the investor;

2. ABC Holdings Limited;

3. the Trustee of a unit trust where the Investor:

· is in a position to cast, or control the casting of, all of the votes that might be cast at a meeting of holders of units in that trust; or

· holds or has a beneficial interest in all of the issued units of that trust;

4. a corporation where ABC Holdings Limited:

· wholly controls the composition of the board of directors of that corporation;

· in a position to cast, or control the casting of, all of the votes that might be cast at a general meeting of that corporation; or

· holds or has a beneficial interest in all of the issued share capital of that corporation; and

5. any person determined by the Investor to be a Permitted Purchaser, not being a person described in paragraphs 1, 2, 3 or 4 of this definition.

Purchaser:

a Permitted Purchaser who has accepted an Irrevocable Offer under clause x.x or is bound to purchase part of the Property pursuant to the exercise of the Put Option.

Put Option

the option granted by the Investor to the Owner under clause 3 requiring the Investor to purchase the Property

Parties to the signed Option Deed

The Owner, Purchaser and other parties entered into the Option Deed 2 years ago under which:

· the Owner has agreed to make an offer (Irrevocable Offer) to sell the Property, or part of the Property, to each Permitted Purchaser on the terms of the Contract.

· the Purchaser has agreed to grant the Put Option to the Owner over the Property, requiring the Purchaser to purchase the Property.

The Option Deed indicates that parts of the Property as defined in the Option Deed are not, as at the date of the deed, separate lots with individual certificates of title, and that at any time after the date of the deed, the Developer may procure the registration plan of subdivision so as to create appropriate separate lots with individual certificates of title.

The proposed sale was expected to have settled last year.

The copy of the Draft Contract between the Owner and the Purchaser provided is neither signed nor dated and, amongst other things, the description of the land being sold and the purchaser have not been specified, with notes inserted as follows:

Land: [Drafting note: Title details to be inserted pursuant to irrevocable offer and put option deed]

Purchaser: [Drafting note: Name, address and ABN to be inserted pursuant to irrevocable offer and put option deed]

The option for the use of the margin scheme has not been selected in the Draft Contract.

B Land:

The aerial photograph of the area which includes the B Land was taken 2 years ago. The photograph identifies the Overflow Carpark which is situated in the B Land. The B Land is shaded in blue on the photograph.

The site of the B Land was originally covered with woodland which was cleared for use, the improvements for which have been removed.

You advise that based on a site visit and as shown on the aerial photograph the land comprising the B Land contains only the Overflow Carpark, other minor paved areas and vast amounts of vacant unused land with overgrown grasses, trees and shrubs as per the photographs taken of the site 2 years ago. You also note:

i. it has sloped grass/weed -covered areas, mounds and concrete rubble (refer to site photos 1 and 2 )

ii. it has drainage swales along the southern and western sides (refer to site photo 3) and

iii. it is fenced along all boundaries (refer to site photo 4).

The Overflow Carpark was constructed in or around a number of years ago to be used as an overflow carpark for workers on the construction of the adjacent town centre (which is shaded in yellow). Whilst it is no longer used, the Overflow Carpark currently consists of:

i. a bitumen carpark and access road (refer site photos 5 and 6)

ii. overhead power lines, and

iii. a light pole with lumiere.

Other minor paved areas exist on the site; one beside the Zone Substation on the north of the site which includes a light pole and signage (the Substation itself is on a separate title to the B Land site, and is therefore not the subject of this ruling) and an access roadway to a particular carpark (the carpark itself is on a separate title, not the subject of this ruling).

The Overflow Carpark and the other minor paved areas are no longer needed and are not going to be part of any future development on the B Land.

A clause of the Option Deed provides for 'licence to use overflow carpark' and states:

The Developer agrees to grant the Investor (or its nominee) a sub-licence to use the Overflow Carpark.

As soon as reasonably possible after the date of this deed and no later than a certain time and date specified, the Developer and the Investor (or its nominee) must meet and in good faith seek to agree the terms of the sub-licence to use the Overflow Carpark.

The Developer and the Investor acknowledge that the sub-licence must:

commence promptly after the meeting held pursuant to the relevant specified clause and not expire until the earlier of:

A. the completion date of the Contract relevant to that part of the Property on which the Overflow Carpark is located; and

B. the date on which the Overflow Carpark is removed pursuant to the relevant specified clause;

be for consideration of not more than $ per annum;

not be on terms more onerous than the terms of any licence granted to the Developer to use the Overflow carpark;

require the Investor (or its nominee) to erect fencing during Peak Periods around the Overflow Carpark;

require the Investor (or its nominee) to line mark the Overflow Carpark;

require the Investor (or its nominee) to have security persons patrol the Overflow Carpark;

require the Investor (or its nominee) to install mobile and temporary security lighting in the Overflow Carpark;

require the Investor (or its nominee) to secure the Overflow Carpark as it considers necessary;

require the Investor to remove any of its fencing, lighting, line marking or other installation of the Investor from the Overflow Carpark if required by the Developer if this deed is terminated;

allow the Investor and its invitees to park motor vehicles in the Overflow Carpark only during Peak Periods; and

allow the Investor to land a helicopter on the Overflow Carpark in agreed circumstances.

A clause of the Option Deed states:

If, as part of the application for, or as a consequence of, the Private Ruling, the Investor requires the Overflow Carpark or any works (reasonably approved by the Developer and Owner) to be removed from the Property:

the Owner and the Developer agree that the Investor may at its cost remove the Overflow Carpark or those other works at its cost and risk; and

the Owner and the Developer must allow the Investor access to the Property for the purposes of removing the Overflow Carpark or those other works.

...

You advise that given its limited value, limited use and it not being part of future development, the Purchaser has the right to have the Overflow Carpark removed before settlement pursuant to the relevant specified clause of the Option Deed. Your plan is for the Overflow Carpark and the other minor paved areas removed prior to settlement.

The Remaining Land:

The Remaining Land contains various improvements such as pathways and gardens, which will be in place at the time of settlement.

Additional information:

Google website provides images of maps and the satellite map of the area (Lot B - B Land) appears to be imaged more recently.The map includes, amongst other images, the following:

An uncovered carpark site which surface appears to be sealed. (This image correlates with your description of the carpark being a bitumen carpark).

Car parking bays line marked with a number of parked vehicles and many more vacant bays. Adjoining the carpark is another patch which is smaller in size to the carpark and which also appears to have the same sealed surface image.

The carpark is shown as being accessible by a road. This road cuts through the B Land feeding off a road on one side and off another road on the other side of the site.

This road appears to be sealed in certain parts of its length. A winding mud road within the B Land is also shown on the map.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

The A New Tax System (Goods and Services Tax) Act 1999 section 11-15

The A New Tax System (Goods and Services Tax) Act 1999 section 195-1

The A New Tax System (Goods and Services Tax) Act 1999 section 38-445.

The A New Tax System (Goods and Services Tax) Act 1999 subsection 38-445(1)

Reasons for decision

Please note in this ruling, unless otherwise stated:

· all legislative references are to the A New Tax System (Goods and services Tax) act 1999 (GST Act)

· all reference material referred to is available on the ATO website, www.ato.gov.au

Under section 11-5:

You make a creditable acquisition if:

a) you acquire anything solely or partly for a *creditable purpose; and

b) the supply of the thing to you is a *taxable supply; and

c) you provide, or are liable to provide, *consideration for the supply; and

d) you are *registered, or *required to be registered.

The terms marked with an asterisk are defined in section 195-1.

In your situation, you or the Permitted Purchaser will be making a creditable acquisition in acquiring the Property or a part of the Property if all the requirements in section 11-5 are satisfied.

Supplies made under the margin scheme do not give rise to creditable acquisitions. Your submission does not make any reference to the margin scheme and the option to use the margin scheme has not been selected in the Draft Contract. Accordingly, the margin scheme issue will not be further discussed in this ruling.

Of particular relevance is paragraph 11-5(b), that is, whether the supply of the Property or a part of the Property by the Owner is a taxable supply.

Section 9-5 provides for the requirements of a taxable supply.

You make a taxable supply if:

a) you make a supply for *consideration; and

b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

c) the supply is *connected with Australia; and

d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

Divisions 38 and 40 consider the GST-free and input taxed provisions respectively.

On the facts provided, the supply of the Property or a part of the Property would not be an input taxed supply under Division 40.

In considering Division 38, section 38-445 which provides for grants of freehold and similar interests by governments is relevant. Section 38-445 states:

(1) A supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if:

(a) the supply is of a freehold interest in the land; or

(b) the supply is by way of long-term lease.

(1A) A supply by the Commonwealth, a State or a Territory of land is GST-free if:

(a) the supply is of a freehold interest in the land, or is by way of *long-term lease; and

(b) the Commonwealth, State or Territory had previously supplied the land, by way of lease, to the recipient of the supply; and

(c) at the time of that previous supply, there were no improvements on the land; and

(d) because conditions to which that lease was subject had been satisfied, the recipient was entitled to the supply of the freehold Interest or the supply by way of long-term lease.

(2) 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.

Your submission does not make any reference, or provide any facts relating, to subsection 38-445(1A). Accordingly, this subsection is not discussed in this ruling.

The Commonwealth, a State or a Territory is not defined in the GST Act. Goods and Services Tax Ruling GSTR 2006/5, Goods and services tax: meaning of 'Commonwealth, a State or a Territory' (GSTR 2006/5) discusses the meaning of 'Commonwealth, a State or a Territory' for the purposes of certain provisions of the GST Act, including section 38-445 -Grants of freehold land and similar interests by governments.

GSTR 2006/5 states further:

6. The Commissioner considers that the Commonwealth, a State or a Territory includes a department, agency or organisation of the type referred to in the definition of 'government entity' in section 195-1.

7. Section 195-1 adopts the meaning of 'government entity' given by section 41 of the A New Tax System (Australian Business Number) Act 1999. This means that the Commonwealth, a State or a Territory, as the case may be, includes any of the following:

(a) a Department of State of the Commonwealth;

(b) a Department of the Parliament;

(c) an Executive Agency, or Statutory Agency, within the meaning of the Public Service Act 1999;

(d) a Department of State of a State or Territory; and

(e) an organisation that:

(i) is not an entity;² and

(ii) is either established by the Commonwealth, a State or a Territory (whether under a law or not) to carry on an enterprise or established for a public purpose by an Australian law; and

(iii) can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation;

whether or not the organisation is part of a Department or branch described in paragraph (a), (b), (c) or (d) or of another organisation of the kind described in this paragraph.

GSTR 2006/5 also explains that the Commonwealth, a State or a Territory is not limited to the departments, agencies and organisations described at paragraph 7 and may include a corporation which is not a 'government entity' as defined in section 195-1. The fundamental principle established by the court cases is that, if the corporation is discharging governmental functions for the State, that is, the State is carrying on the relevant business or other function through the corporation, then the corporation is the State. On the other hand, if the intention is for the corporation to perform its functions independently of, and not as an instrument of, the State (so that the concept of a State activity cannot be realistically applied to that which the corporation does) then the corporation is not the State.

Accordingly, where the Owner, a corporation sole, meets the requirements of the State as set out in GSTR 2006/5, the Owner will be the State.

It is noted that the Australian Business Register (ABR), an extensive database of identity information provided by businesses when they register for an ABN, identifies the Owner as a State Government Entity. Therefore, it is reasonable to assume that the Owner is the State.

Subsection 38-445(1), amongst other things, also requires that the land to be supplied is land on which there are no improvements.

The term 'improvements' is not defined in the GST Act. Where a term is not defined it takes on its ordinary meaning. The Macquarie Dictionary describes improvement, in relation to land, to be:

5. a bringing into a more valuable or desirable condition, as of land; a making or becoming better; a betterment.

6. something done or added to land which increases its value.

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) discusses the meaning of the phrase 'improvements on the land' in the context of the phrases 'improvements on the land' or 'no improvements on the land' in Subdivision 38-N and Division 75.

GSTR 2006/6 states:

20. Unimproved land is taken to be land in its natural state. Thus, to establish whether there are improvements on the land for the purpose of these provisions, the land is compared with land in its natural state.

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 date³ for ascertaining whether there are improvements on land.

23. Where there has 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.

The table in paragraph 34 of GSTR 2006/6 specifies the relevant day for ascertaining whether there are improvements on the land. In relation to subsection 38-445(1) the relevant day is specified as the day 'when the supply is made'.

This is further explained in Property and Construction Industry Partnership - Issues Register - Section 15 - Sale of real property (P & C Issues Register) which provides that 'made available to the recipient' is the time of settlement of the sale contract. This is because it is at this time that equitable ownership and possession of the property transfers to the recipient and the recipient has full use and enjoyment of the property.

Issue 15.4.14 of the P & C Issues register states:

...Under section 6(3) of the Transition Act, the time of the supply of real property is when it is made available to the recipient. Real property takes the same meaning in the Transition Act as that given in the GST Act. Section 195-1 of the GST Act defines real property to include:

(a) any interest in or right over land

(b) a personal right to call for or be granted any interest in or right over land, or

(c) a licence to occupy land or any other contractual right exercisable over or in relation to land...

1. Sale of land or buildings

The real property here is the freehold interest in land. We consider the property to be made available when the freehold interest in the property is made available, that is, at the time of settlement of the sale contract.

...

Recipient, in relation to a supply, is defined in section 195-1 to mean the entity to which the supply was made. As you have applied for this ruling as the Purchaser, we consider you or the relevant Permitted Purchaser will be the entity acquiring the Property or a part of the Property. That is, you (or the Permitted Purchaser) will be the recipient in this case.

Accordingly, we consider the supply of the Property or a part of the Property will be made on settlement date even though you have been granted a sub-licence to use the Overflow Carpark prior to settlement.

Are there improvements on the relevant land at settlement date?

Paragraph 25 of GSTR 2006/6 lists the following examples of human intervention 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.

Each of the operations stated above are human intervention which may have the effect of adding value to the land at the time those things were created or added.

Paragraphs 32 and 33 of GSTR 2006/6 discuss multiple human interventions on the land and state:

32. Where there are a number of human interventions on the land, it is not appropriate to take a holistic approach to establishing whether there are improvements on the land. Instead, it is necessary to determine whether any of the human interventions enhance the value of the land. If any of the human interventions enhance the value of the land there are improvements on the land.

33. For example, a building that is uninhabitable because it is derelict and condemned by order of the local council does not enhance the value of the land. The building in these circumstances is a detriment rather that an improvement. However, if the land on which the building is located is cleared and the clearing has not deteriorated or has not degraded the land, there are improvements on the land. The clearing still enhances the value of land.

Whether a human intervention enhances the value of the land is an objective test which cannot be determined by reference to use or intended use by either the supplier or the recipient. The issue of whether there are improvements on the land is a question of fact.

We have taken into account the facts available and consider there are improvements on the land referred to as the B Land and the Remaining Land at the time of settlement. This is because of the following human interventions on the land that enhance the value of the land:

B Land:

· bitumen carpark/helicopter landing pad

· other 'minor paved areas'

· internal roads

· drainage swales

· fencing around all boundaries

· overhead power lines

· light pole with lumiere

· clearing, levelling or filling of land to construct the carpark/helicopter landing pad and the roads

Remaining Land

· various human interventions such as pathways and gardens

You intend to have the Overflow Carpark and the other minor paved areas removed. The Option Deed provides for the Overflow Carpark or any other works to be removed from the Property.

The term 'any other works' is not defined in the Option Deed. Where the carpark and 'any other works' are removed prior to settlement, the removal will not change the fact that there are improvements on the land. This is because:

· where some (and not all) of the above listed improvements are removed, there will be other improvements on the land at settlement date.

· where the carpark and all other works are removed we consider the land would not be land in its natural state. For example, the construction of the carpark/helicopter landing pad, the minor paved areas and the internal roads would have required clearing, levelling, filling, and compacting. The clearing of the land in this case enhances the value of land (rather than causes degradation to the land) and with their removal, the land when compared to the land in its natural state before these constructions, cannot be considered as land in its natural state.

· the overhead powerlines indicate the availability of electricity connected or available for connection. This improvement may not be removed or removable by land owners.

Under the circumstances, subsection 38-445(1) will not be satisfied and from the perspective of the vendor, it is unlikely that the Owner will be making a GST-free supply of the land. Accordingly, where the Owner satisfies all the requirements of section 9-5 they will be making a taxable supply of the Property or parts of the Property. If this is the case and all the other provisions in section 11-5 are met, then you or the relevant Permitted Purchaser will be making a creditable acquisition in acquiring the Property or parts of the Property.

In summary, we consider that you (ABC Limited as the trustee for ABC Trust) or the relevant Permitted Purchaser will be making a creditable acquisition when acquiring the property located at the specified address (the Property) or parts of the Property where all the requirements under section 11-5 of the GST Act are satisfied. The GST-free provision in subsection 38-445(1) is unlikely to apply to the supply as we consider the relevant land is not land on which there are no improvements.

Additional information:

In your analysis, you made reference to the edited version of private binding rulings from the register of private binding rulings published on the Tax Office website.

The purpose of the publication is to enhance the integrity and transparency of the private ruling system and enables the recipient of written binding advice to confirm that it is official Tax Office advice. In addition, a record on the register is not an authority for the purposes of establishing a reasonably arguable position for other entities to apply to their own circumstances.

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