Edited version of your written advice

Authorisation Number: 1012665206220

Ruling

Subject: GST and supplies of real property

Question

Will your supply of vacant land be a GST-free supply of real property under section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No.

Relevant facts and circumstances

You are a local government registered for GST.

You own multiple properties.

You have owned the properties since prior to 1 July 2000. During this time, the properties have been vacant land.

The properties were all previously used as drainage sumps. Soil was excavated from the land to create a drainage ditch into which excess rain water from surrounding areas could flow.

The properties have had the excavations filled in to bring the land to a state close to what it was prior to the excavations. You have provided a photo of each property.

The photo of one of the properties shows that the property has a fence across the front.

You intend to sell the properties in the near future.

You have obtained a valuation report on factors that are likely to influence the sales price and value of the properties.

You contend the following:

• The properties comprise land on which there are no improvements or if there are improvements they do not enhance the value of the Properties and thus are not improvements for the purposes of section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999.

• The value of the land is dictated by supply and demand, location factors and many other things but whether the land is in its virgin state or not is not relevant to value. No human interventions since the land was in its virgin state have improved the value of the land. The land sits in a metropolitan area and the value of these types of properties is not dictated by whether the land is in its virgin state or not. In a metropolitan area dealing with land where the price of the land is driven by supply and demand the presence of a neighbour's fence, or the fact that a few trees may have been cleared is not relevant to the value of the land.

• The properties have not been levelled, other than whatever was necessary to fill in the excavated sump. The landform has the same degree of flat areas as the adjoining properties.

• The fact that the land was excavated and used as a drainage sump and then filled may be a human intervention that could decrease the market value of the property due to potential problems with building on filled land. The area in which purchasers would want to construct their house is on filled land and this may be more costly to build on because of extra foundation costs.

• The natural landscape around the properties was not heavily timbered and was scattered trees. All of the properties show some degree of remaining trees. Whilst some land has been cleared in order to excavate the land to create the previous drainage sumps on each of the properties there is no evidence to suggest that trees were removed as part of that excavation process. In any event the removal of a small number of scattered trees on the properties would not enhance the value of those properties.

• There is no significant fencing on the properties. Fencing around the properties is fencing that is on the side and rear borders and belong jointly to the local government and the neighbours. There is no fencing to the front of the properties, other than some chain wire security fencing on one of the blocks of land. Fencing around 3 sides of the Properties is not 'on the land' and thus cannot be an enhancement to the land or on the land. In any event such fencing does not increase the value of the Properties.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-445(2).

Reasons for decision

In this ruling, please note:

• All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise.

• All terms marked by an asterisk are a defined term in the GST Act unless stated otherwise.

Section 38-445 states, in part:

(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) …

…

(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.

Goods and Services Tax Ruling GSTR 2006/5 Goods and services tax: meaning of 'Commonwealth, a State or a Territory' discusses the meaning of 'Commonwealth, a State or a Territory' for the purposes of section 38-445.

You are a local government and we accept you are a State.

For the purposes of section 38-445, the supply of the land is a supply of a freehold interest in land by a State, you held the land prior to 1 July 2000 and it has not previously been supplied under section 38-445.

All that remains to be determined is whether this is 'land on which there are no improvements'.

Improvements on the land

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 'land on which there are no improvements'.

Paragraph 20 of 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 land has been subject to various improvements. Each property was originally used as a drainage sump for the surrounding area. Subsequently, each property has been filled so that the properties can be sold as residential blocks of land.

GSTR 2006/6 follows the principle of 'improvement' established by the High Court in Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503:

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

The application of this principle to 'improvements on the land' is set out in paragraph 22 of GSTR 2006/6, which states:

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.

We must establish if there are human interventions, physically located on the land, that enhance the value of the land.

Paragraph 24 of GSTR 2006/6 states:

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.

Examples of human interventions that may enhance the value of land are provided in paragraph 25 of GSTR 2006/6, which states:

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.

Valuation report

You have obtained a valuation report on factors that are likely to influence the value of the three properties. The Commissioner of Taxation is not bound by a professional valuer's opinion of the land. However, an objective consideration as to whether a human interaction enhances the value of the land, may be assisted by a valuer's assessment of improvements on the land conducted in accordance with the parameters outlined in GSTR 2006/6.

Human interventions relevant to your land

As explained in paragraph 23 of GSTR 2006/6, if there are human interventions that enhance the value of the land, then there are improvements on the land. Any human intervention is considered to mean any single human intervention. We are not looking at the net value of human interventions.

The human interventions on the properties that are still evident include:

clearing of the land

• We consider that there has been clearing of the land to some extent and this is a human interaction that enhances the value of the land in accordance with paragraphs 22 of GSTR 2006/6. As per the principles from Lewis Kiddle and another v. Deputy Federal Commissioner of Land Tax 27 CLR 316, outlined in paragraph 31 of GSTR 2006/6, the value attributable to the existing clearing is the cost that another purchaser (any purchaser) would be relieved from incurring.

filling in of the drainage sump and levelling

• We consider that there has been filling and to some extent levelling which are human interventions that enhance the value of the land in accordance with paragraphs 22 of GSTR 2006/6. The value attributed to the filling in of the sump and levelling is the cost any purchaser would be relieved from incurring, as per paragraph 31 of GSTR 2006/6. While their maybe potential difficulties in building on the land that has been filled, the value of the enhancements, namely the filling and any levelling is not reduced.

fencing - one property only

• As there are other human interventions across all three properties, we will not consider the chain wire security fencing across the front of the above property.

Overall, you contend that if there are improvements on the properties they do not enhance the value of the properties as the value of the property is determined by market supply and demand.

Paragraph 32 of GSTR 2006/6 states that it is not appropriate to take a holistic approach to establishing if there are improvements on the land. If any human intervention enhances the value of the land, it is an improvement.

The properties each have human interventions which enhance the value of the land. As such, the properties are not unimproved land for the purposes of subsection 38-445.

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