Edited version of your written advice

Authorisation Number: 1012734228729

Ruling

Subject: Goods and services tax and the margin scheme

Question

Is the Entity A entitled to a refund of overpaid GST in the amount of $xx related to the sales of real estate under the margin scheme where the GST payable was previously miscalculated?

Answer

No. Entity A is not entitled to a refund of overpaid GST in the amount of $xx related to the sales of real estate under the margin scheme where the GST payable was previously miscalculated.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A is owns substantial parcels of land, much of which it has owned since before 1 July 2000.

Entity A through its agent has submitted an application for a private ruling (ruling application) to the ATO in relation to the application of the margin scheme to its sales of certain blocks of land.

Entity A has subdivided land into blocks and some of these subdivided blocks have been sold off since 1 July 2000 (Relevant Period).

Several subdivided blocks collectively referred to herein as the "Properties", were sold pursuant to standard Contracts for the Sale of Land. These Properties are the subject of the ruling application and a detailed description of the sales of the Properties is provided as "Annexure A" of the ruling application.

The parties to the sales of the Properties did not agree to use the margin scheme at the time of sales. Entity A sought extension of times to obtain agreements with the purchasers that the margin scheme is to apply to the sales of the Properties. These extensions were granted by the Commissioner and Entity A subsequently obtained the agreements in writing; copies of which are attached as "Annexure B" of the ruling application.

The contract for the sale of a particular block is attached as "Annexure C" of the ruling application as a sample contract and is representative of all of the contracts for the sales of the Properties.

Each of the contracts for sale of the Properties provides that the application of GST is to be outlined in the Special Conditions section of the contract or in an attached GST Annexure. None of the contracts deal with the application of GST in either of these ways the result of which means that the price on the cover of the contract is the GST inclusive price. The sales were treated as fully taxable sales by Entity A and Entity A paid GST to the ATO on each of the sales in the relevant tax periods, calculated at 1/11th of the GST inclusive sales price.

Determination of sale price

The price at which the Properties were sold was the market value determined by Entity A as the price at which a willing but not anxious vendor and purchaser would enter into an agreement to transfer the Properties. The price was set by Entity A without taking into consideration any GST that may be payable on the sale of each parcel of land.

Entity A operated in a free market and the Properties were sold at the going market rate.

In arriving at the price at which lots of land were advertised, Entity A did not start with a particular price and then add GST to the prices obtained for the sale of each property. The GST paid by Entity A on each parcel of land is a cost absorbed by Entity A in the same way that costs of undertaking subdivision work including the construction of roads, drainage, sewage and other infrastructure costs are absorbed.

None of the purchasers of the Properties were registered or required to be registered for GST.

Land sales

Entity A has kept records of the land sales made by it during the Relevant Period. Annexure A includes a table of the sales of the Properties made in the Relevant Period that describes the particulars of the Properties sold. Land sales of the Properties in the Relevant Period total $yy.

BASs lodged

In Entity A's Business Activity Statements (BAS) lodged during the Relevant Period, the GST was calculated as 1/11^th of the sale price of the Properties that is 1/11^th of $yy.

Improvements

Attached as "Annexure D" to the ruling application are two aerial photographs, one taken in 200X and the other in 20XX which show the en globo land of which the Properties were part of.

The photograph labelled 200X show that the land, prior to the subdivision and sale of the Properties, had already been extensively cleared of native vegetation, scrub, bushland and mostly devoid of trees.

Valuation

Entity A has provided extracts of valuation of the Properties which is attached to the ruling application as "Annexure E". Annexure E to the ruling application provides Unimproved Land Value Extracts of the Properties around the time of sale of the Properties.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Division 75

Subsection 75-3

Paragraph 75-3(a)

Section 75-35

Reasons for decision

(All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise and words denoted by asterisks (*) are defined in section 195-1 of the GST Act)

As the GST on the sale of the property has been calculated as if the margin scheme was not applicable, we acknowledge that there may have been an overpayment of GST by Entity A when the relevant BASs were lodged. What needs to be determined here is whether the correct valuation day and methodology have been applied by Entity A to value the properties under the margin scheme.

The Commissioner accepts that local government councils can apply item 4 of the table in subsection 75-10(3), where relevant.

Item 4 of the table in subsection 75-10(3) provides that where a 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, then the day on which the valuation is to be made is the day on which the taxable supply takes place.

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) sets out the Commissioner's view on the meaning of the phrases "improvements on the land" or "no improvements on the land" for the purpose of Division 75.

Paragraphs 20 to 23 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.

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.

Further, Paragraph 25 of the ruling provides a list of examples of human interventions which may enhance the value of land that includes:

• 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.

Entity A contends that as at 1 July 2000, the Properties were all unimproved and in their natural state being devoid of built structures and comprised of gently sloping but predominantly flat land with native grasses, shrubs and trees.

However, the photograph labelled 200X show that the land, prior to the subdivision and sale of the Properties had already been extensively cleared of native vegetation, scrub, bushland and mostly devoid of trees. Therefore we consider that as at 200X there were human interventions on the Properties consistent with paragraphs 20 to 23 of GSTR 2006/6.

Paragraph 25 of GSTR 2006/6 provides examples of human interventions which enhance the value of land to include the "clearing of timber, scrub or other vegetation". Accordingly, we consider the human interventions as evident in the 2001Xphotograph would enhance the value of the Properties and therefore there are improvements on the land as at that date. Further, due to the extensive nature of the clearance on the land as at 200X, it is reasonable to assume these improvements would have also been present on the land as at 1 July 2000.

Consequently, we conclude that there are improvements on the Properties as at 1 July 2000 for the purposes of Division 75 which have enhanced the value of the Properties. Therefore the Properties would be ineligible for consideration under item 4 of subsection 75-10(3).

The calculation of the overpayment of GST amounting to $xx is made on the basis of item 4 of subsection 75-10(3) which require the Properties to be valued on the day on which the taxable supply is made and also subsection 75-10(3A) which require these valuations to be made as if there are no improvements on the land in question on the day of the taxable supply.

However, as Entity A is ineligible to apply item 4 of subsection 75-10(3) to calculate the margin for the supply of the Properties, its calculation of the overpayment of GST amounting to $xx is not correct and therefore Entity A is not entitled to a refund of GST amounting to $xx.

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