Edited version of your written advice

Authorisation Number: 1012880512985

Date of advice: 25 September 2015

Ruling

Subject: GST-free supply of land by a Council

Question 1

Is the sale of council land (the property) a GST-free supply under section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supply of the property will be GST-free if the property remains in its natural state when supplied.

Question 2

If the answer to question (a) is no, is the property land on which there were no improvements as at 1 July 2000 for the purposes of item 4 in the table in subsection 75-10(3) of the GST Act?

Answer

Not relevant as answer to Question 1 is in the affirmative

Question 3

If the answer to question (a) & (b) is no, is the property land on which there were no improvements as at 1 July 2000 for the purposes of item 3 in the table in subsection 75-10(3) of the GST Act?

Answer

Not relevant as answer to Question 1 is in the affirmative

This ruling applies for the following periods:

1 July 2014 to 30 June 2015

Relevant facts and circumstances

You are a local council incorporated by a Government.

Local government in Australia is administered under the states and territories. It is not initially mentioned in the Constitution of Australia but is mentioned several times in the Annotated Constitution of Australia namely where "Municipal institutions and local government" appears in Annotation 447. Each state has a local government Act that provides the rules for the creation and operation of councils to handle community needs for the state such as waste collection, public recreation facilities and town planning. The states have primary responsibility for funding and exclusive responsibility for supervision of local councils.

You purchased farming land (the property) in 19XX.

The property is subject to various easements and/or restrictive covenants including:

• water drain easement

• easement for transmission line

• easement for overhead power line

There are no connections of water, electricity, gas, sewerage and telephone.

Since its acquisition by you, the property has been used for the agistment of animals.

You have not:

• done any excavation work, constructed any drainage channels, sumps or dams on the land

• undertaken any filling or levelling of the land

• removed rocks, stones or soil

• cleared any native grasses, shrubs or trees

Several years ago, you required the current tenant to erect temporary fencing to ensure people trespassing on the property were not endangered by the cattle. The tenant has the responsibility to pay for and erect the temporary fencing. Once the agistment period ceases, the tenant will be responsible for removing the temporary fencing and leaving the property as it was when it was first agisted.

The property has remained in its natural state since you obtained it in 19XX. Photographic evidence was provided to show that the property has not changed from its natural state.

Negotiations have been entered into by you with a property developer to sell the property. As part of this process, a formal written valuation was provided valuing the property as at 1 July 20YY.

Relevant legislative provisions

Section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Under subsection 38-445(1) of the GST Act, 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) is by way of long-term lease. 

Commonwealth, State or Territory

The words "the Commonwealth, a State or a Territory" are not defined in the GST Act. The Acts Interpretation Act 1901 (Cth) provides that, unless a contrary intention appears:

• "The Commonwealth" means the Commonwealth of Australia and, when used in a geographical sense, includes the Territory of Christmas Island and the Territory of Cocos (Keeling) Islands, but does not include any other external Territory;

• "State" means a State of the Commonwealth;

• "Territory" means a Territory referred to in section 122 of the Constitution, and includes a Territory administered by the Commonwealth under a Trusteeship Agreement.

In paragraph 6 of GSTR 2006/5, 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 of the GST Act. Paragraph 7 of GSTR 2006/5 states that section 195-1 of the GST Act 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.

A local government is not a 'government entity' under the above criteria.

Paragraphs 13 to 15D of GSTR 2006/5 state the Commissioner's position regarding local governments:

13. Local governments may be a State or Territory. As is the case for corporations, the Commissioner considers that the principles developed by the High Court of Australia in cases concerning the meaning of 'a State' in section 114 of the Constitution, as described at paragraphs 8 to 12 of this Ruling, also apply in determining whether a particular local government is a 'State' or 'Territory' for the purposes of the GST Act.

14. There have been several cases in which the Courts have considered whether a local government is a 'State' for the purposes of section 114 of the Constitution.

15. In The Municipal Council of Sydney v. The Commonwealth ²³ (' Municipal Council of Sydney'), in three separate judgements, all judges of the High Court agreed that the Municipal Council of Sydney was the 'State' for the purposes of section 114 of the Constitution. The power delegated to the Council, by State legislation, which allowed the Council to levy rates, was the determinative factor in that case.

15A. In Deputy Commissioner of Taxation v. State Bank of New South Wales ,²⁴ the High Court referred to the Municipal Council of Sydney decision and said:

Indeed, the decision in Sydney Municipal Council v The Commonwealth is direct authority for the proposition that a corporation exercising governmental functions is 'a State' for the purposes of section 114.

15B. The Full Federal Court's decision in Greater Dandenong City Council v. Australian Municipal, Administrative, Clerical and Services Union ²⁵ (' Dandenong City Council ) is another instance where a local government was considered to be a 'State' for the purposes of section 114 of the Constitution, albeit that it was the constitutional immunity under paragraph 51(xxxv) of the Constitution that was the key focus of that case. In his judgement, Finkelstein J referred to the Municipal Council of Sydney decision and considered several aspects of the statute under which the Council was established in reaching the conclusion that the Council was a 'mere instrumentality of the State'. ²⁶

15C. The Municipal Council of Sydney decision and the Dandenong City Council decision both turned upon the specific features of the particular Councils involved; those specific features being bestowed upon them by State legislation.

15D. These decisions demonstrate that the legislation constituting a particular local government must be considered to determine whether it is a State for the purposes of section 114 of the Constitution. These decisions do not stand for a general proposition that local governments are a State for the purposes of section 114 of the Constitution.

Further to paragraph 15B above, Finkelstein J in paragraph 226 of the Dandenong City Council case said that the local government in that case was a mere instrumentality of the State by virtue of the statute pursuant to which it was established which included such things as carrying out functions of government, providing for the peace, order and good government of its municipal district, making local laws which are punishable by fines if contravened and raising taxes in the form of general rates and charges. However these wide powers don't prevent the council from being under the direct control of the state executive by its local laws being able to be revoked by the state, submitting annual reports to the state Minister and having its rates and charges limited by the state.

The NSW Local Government Act 1993 is similar to that of the State legislation in Dandenong City Council whereby, amongst other things, the following matters are legislated:

• The definition of council's functions

• Use and management of community land

• Classification and reclassification of public land

• Water supply, sewerage and stormwater drainage works and facilities

• Provisions concerning council meetings

• Making and levying of rates and charges and their limits

Therefore, the Council is an instrument of the State

No improvements

GSTR 2006/6 Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75 contains the Commissioner's interpretation of what comprises improvements to land. Paragraph 20 of GSTR 2006/6 provides that unimproved land is land in its natural state. Therefore, to determine whether there are improvements on the land or not, the land must be compared with the land in its natural state.

GSTR 2006/6 follows the principle established by High Court in Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 and states at paragraph 22:

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.

The issue of whether there are improvements on the land is a question of fact.

Paragraph 25 provides a list of examples of human intervention 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

• 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

• removal of rocks, stones or soil

• filling of land.

In this matter you have simply allowed the property to be used for the agistment of animals since its purchase in 19XX. You have not:

• done any excavation work or constructed any drainage channels, sumps or dams on the land

• undertaken any filling or levelling of the land

• removed rocks, stones or soil

• cleared any native grasses, shrubs or trees

• carried out or arranged for the connections of water, electricity, gas, sewerage or telephone.

The creation of easements and restrictive covenants do not inherently increase the value of land and can actually in some cases create a burden and devalue it. There is no evidence that in this case, the easements and restrictive covenants have improved the land and value.

Temporary fencing erected by the tenant to protect members of the public to be in place only for the duration of the agistment lease does not constitute an improvement on the land. The fencing will be dismantled at the end of the lease and will not be in place at time of sale.

Comparisons of aerial photos of the property indicate that the land has remained in its natural state.

Accordingly, the land comprising the property is unimproved for the purposes of subsection 38-445(1) of the GST Act and your supply of the property will be GST-free if the property remains in its natural state when supplied.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).