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Ruling

Subject: Goods and Services Tax - Subdivision of land

Question 1

Was Lot 1 land upon 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

No

Question 2

Was Lot 2 land upon 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

No

Question 3

Will the sale of individual lots subdivided and sold from Lots 1 and 2 constitute the sale of land upon which there were no improvements as at 1July 2000 for the purposes of item 4 in the table in subsection 75-10(3) of the GST Act?

Answer

No

Relevant facts and circumstances

You are a State Government body.

You were registered for GST as of 1 July 2000.

You acquired Lot 1 and Lot 2 prior to 1 July 2000.

Prior to 1 July 2000 the land was predominantly cleared of natural vegetation and planted with trees.

Little or no levelling or earth works occurred on the land with the trees being planted on the lands' natural topography.

Herbicidal treatments in line with normal plantation practice were performed on the relevant land.

As at 1 July 2000

· portions of the lots were zoned "residential"

· the perimeter was fenced with wire and post fencing

· the plantation was not fully mature

· there were no sealed roads on either lot

· no utilities were connected to either lot.

The plantation was harvested some time after 1 July 2000.

At 1 July 2000:

· the costs of removing the trees from the broad acre land parcels would not have exceeded the sales revenue from selling the harvested trees

· an area the size of a subdivided lot (up to 600 sq meters) when considered apart from the larger area in which it is subdivided, would not have had a saleable volume of standing trees and the costs associated with removing the trees would mean that harvesting the trees would not be commercially viable.

Relevant legislative provisions

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

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

Reasons for decision

Question 1 and 2

Item 4 of the table in subsection 75-10(3) of the GST Act applies to taxable supplies of real property under the margin scheme where the supplier is the Commonwealth, a State or 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.

Goods and Services Tax Ruling 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 of the phrase 'no improvements on the land'.

Paragraphs 20 - 22 of GSTR 2006/6 state:

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.

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 examples of human interventions which may enhance the value of land. These include:

· fencing

· clearing of timber, scrub or other vegetation

In considering the application of item 4 of the table in subsection 75-10(3) of the GST Act to Lots 1 and 2 as outlined in the facts above, the relevant date to consider whether there were no improvements on the land is 1 July 2000. As at that date, the land had been

· predominantly cleared of remnant vegetation

· planted with trees (with associated herbicidal treatments) and

· fenced on its perimeter

While these are all human interventions on the land, consideration is also given to whether any of these interventions enhance the value of the land at the relevant date. If so, there are improvements on the land, regardless of whether the net value of the human interventions enhances the overall value of the land. (GSTR 2006/6 paragraphs 23 & 32)

In Commonwealth of Australia v Oldfield (1976) 133 CLR 612 the High Court described improvements on the land in the following manner.

"We are concerned with the value at the relevant date of the physical consequences which enure to the land of the acts whereby the land attained a quality and usefulness additional to that which it had in its virgin state…"

When comparing the land at 1/7/2000 with land in its virgin state, the clearing of natural bush and planting of trees (with associated herbicidal activities) displays a quality and usefulness additional to that in its virgin state. It is therefore considered that there has been an enhancement of the value of the land and therefore improvements on the land.

However, on occasion there may be improvements on the land which, as of the relevant date, have deteriorated or degraded to such an extent that they can no longer be considered improvements.

As of 1 July 2000, at least in part, the land had been rezoned residential. You consider that the existence of an immature plantation on land re-zoned as residential results in prior human interventions (and therefore improvements on the land) either having devalued the value of the land or being a benefit no longer in existence at 1 July 2000.

The fact that the land has been rezoned for a different use from the then rural application, at least in part as of 1 July 2000, does not automatically render activities previously undertaken on the land not an enhancement, or result in a conclusion that they are sufficiently degraded or deteriorated.

The application of the objective test as stated in paragraph 35 of GSTR 2006/6 requires that a determination of the enhancement of the value of land should not be made by reference to use or intended use of the vendor or purchaser. For example, real property with a building on it that is not condemned enhances the value, even though the recipient may intend to demolish the building and construct some other building in its place.

As stated above, the plantation at the relevant time was a human intervention leading to an enhancement of the value of the land and therefore the land is considered improved land. The fact that, taking into account the plantation as a whole, the sales revenue from selling the harvested trees as at 1 July 2000, would have exceeded the costs of removing the trees from the broad acre land parcels supports the conclusion that, although the plantation was immature as at 1 July 2000, it still added value to the land. There is therefore no degradation or deterioration of an improvement to the land.

Accordingly Lots 1 and 2 were land on which there were improvements as at 1 July 2000.

Item 4 of the table in subsection 75-10(3) of the GST Act cannot therefore be applied.

Question 3

In the case of a decision that there have been improvements to either Lot 1 or Lot 2 you contend that the human interventions that have enhanced the value of these lots cannot be taken to increase the value as at 1 July 2000 of the individual allotments subdivided from the land.

You refer to paragraph 50 of GSTR 2006/6 as support for the view that it is the subdivided lots themselves, rather than the broader en globo land, which are to be assessed as to improvements as at 1 July 2000.

You note that

· commercial timber plantations are only feasible on a broad acre perspective where economies of scale exist in terms of maintenance and harvesting costs associated with the plantation, and

· when an individual subdivided lot is considered in isolation from the broader landholdings no such economies exist for the individual sub-divided lots.

Item 4 of the table in subsection 75-10(3) of the GST Act is concerned with the application of the margin scheme to work out the GST payable on taxable supplies of real property. Item 4 apples where:

The supplier is the Commonwealth, a State or 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.

Item 4 applies to taxable supplies of land or premises on which there were no improvements as at 1 July 2000. The 'land or premises in question' is the land or premises subject to the supply. Therefore, if the land or premises subject to the supply is a sub-divided lot of a broad acres estate, it must be established whether there were improvements on the sub-divided lot, rather than the broad acres estate. This is consistent with the view set out in paragraph 50 of GSTR 2006/6 and forms the basis for the treatment of land described in paragraphs 48 and 49 of GSTR 2006/6. In this case it is understood you are making taxable supplies, each consisting of individual sub-divided lots. Therefore it must be ascertained whether there were improvements on each of the sub-divided lots, rather than en globo lots 1 and 2.

On 1 July 2000 each of the individual lots in question formed part of a plantation, which constituted improvements on the en globo land. This set of facts is, however, distinguishable from the example set out in paragraphs 48-50 of GSTR 2006/6 as the land in question in that example was unimproved when it formed part of the larger piece of land.

It is an artificial construct to consider the saleable volume of standing trees and the costs associated with removing the trees on each of the subdivided lots in isolation, as the commercial activity which led to the improvements was undertaken over the whole of en globo lots 1 and 2. Rather, it would be reasonable to determine the viability of the tree harvesting on each of the subdivided lots by offsetting the value of the saleable volume of standing trees and a relevant portion of the actual costs of harvesting the trees from en globo lots 1 and 2. For example, if the saleable volume of standing trees in en globo Lots 1 and 2 was $15 per cubic meter and cost $10 per cubic metre to harvest, then the value of $15 and cost of $10 should be allocated to each cubic metre of standing trees in each of the sub-divided lots to establish whether the trees constitute an improvement on the land. For a sub-divided lot with one cubic metre of standing trees the improvement would have a value of $5.

As at 1 July 2000, the costs of removing the trees from the broadacre land parcels would not have exceeded the sales revenue from selling the harvested trees. It is therefore reasonable to expect that the value of the saleable volume of trees on each of the sub-divided lots exceeds the value attributable to the lot of the costs that were incurred in harvesting the trees. Therefore the sub-divided lots were improved as at 1 July 2000.

Item 4 of the table in subsection 75-10(3) of the GST Act would not apply to work out the GST payable on a taxable supply of the sub-divided lots.

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