Edited version of private advice

Authorisation Number: 1051703622070

Date of advice: 25 June 2020

Ruling

Subject: GST and unimproved land

Question 1

Was the supply of the Land by Entity A to the developer a GST-free supply of land on which there are no improvements for the purposes of section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

If the answer to Question 1 is 'yes', will Division 142 of the GST Act apply if Entity A requests that the Commissioner of Taxation refund the 'excess GST' paid in relation to the supply of the Land to the developer which was previously treated as a taxable supply with the margin scheme applied?

Answer

Not applicable.

Relevant facts and circumstances

The Contract for Sale

Entity A entered into a Contract for Sale (Contract) pursuant to which it agreed to grant a 99 year Crown Lease for the Land to the developer. The Completion Date of the Contract was specified and the executed Crown Lease was granted on this date.

The Land

·   The Land location was specified and described.

·   As at the date of the subject transaction, the Land was Crown Land that was owned by the Commonwealth.

·   Infilling was done on the Land using man made fills and soils excavated from surrounding demolition and remediation works which had been contaminated.

·   The Land has been the subject of extensive investigation to determine the suitability of the soil and land for residential development. Relevant documents were provided.

·   Various aerial photographs of the Land were provided, including one taken at Completion Date.

·   The parcel of Land was created by an application to register the deposited plan on a specified date and has at all times been owned by the Commonwealth.

·   There has not been a previous GST-free supply of the Land since 1 July 2000 for the purposes of subsection 38-445(2) of the GST Act.

The private ruling application identified the following human interventions on the Land based on available information and the aerial photograph taken on, or close to, the Completion Date of the Contract:

·   Clearing

·   Ongoing excavation of the Land, and

·   Perimeter fencing of the Land

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 142

A New Tax System (Goods and Services Tax) Act 1999 Section 142-5

Reasons for decision

·         In this reasoning, please note:

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

·         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

·         all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

Summary

The Land is not land on which there are no improvements. Therefore, the requirements of section 38-445 are not satisfied and the supply of the Land from Entity A to the developer is not GST-free. The supply is a taxable supply where the requirements of section 9-5 are met.

Detailed reasoning

A supply of land by the Commonwealth, a State or a Territory of land is GST-free under subsection 38-445(1) if certain conditions are met. Subsection 38-445(1) states the following:

(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.

However, pursuant to subsection 38-445(2), the supply will not be GST-free if the land in question has already been the subject of a supply that was GST-free under section 38-445.

Therefore, for the supply of the Land to be GST-free under subsection 38-445(1), the following requirements must be satisfied:

·   a freehold interest in land or long-term lease must be supplied by the Commonwealth, a State or Territory, and

·   there must be no improvements on the land at the relevant day.

Pursuant to the Contract, Entity A supplied the Land to the developer by way of a 99 year Crown Lease which meets the definition of long-term lease in section 195-1 of the GST Act.

In accordance with the advice in Goods and Services Tax Ruling GSTR 2006/5 Goods and services tax: meaning of 'Commonwealth, a State or a Territory', Entity A is the Commonwealth, State or Territory' for the purposes of section 38-445.

Therefore, it remains to be determined whether the requirement that there are no improvements on the land at the time you supplied the Land to the developer will be met.

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

At paragraph 20 of GSTR 2006/6, the ruling states that 'unimproved land' is taken to be land in its natural state. Therefore, to establish whether there are improvements on the land for the purposes of subdivision 38-N and Division 75, the features of the land in question are to be compared at the relevant time with the features of that land in its natural state.

Furthermore, paragraph 21 of GSTR 2006/6 explains that any operation by humans on the land that has the effect of enhancing the value of the land is an 'improvement' (Morrison v Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503).

Paragraphs 21A to 21C explain that, taking into account the views expressed in the cases referred to, improvements can also include human interventions that improve the usefulness of the land.

GSTR 2006/6 states at paragraph 22 that there is nothing in the GST Act which requires a restrictive or narrow meaning to be adopted for 'improvements'. In accordance with the ordinary meaning of the word and taking into account the views expressed in the cases referred to in paragraphs 21 to 21C of this Ruling, 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

·   at the relevant date for ascertaining whether there are improvements on land, the human intervention must enhance:

-   the value of the land

-   the usefulness of the land, or

-   both the value and usefulness of the land.

Paragraph 22A of GSTR 2006/6 states that a physical human intervention on land that enhances the usefulness of the land does not necessarily have to also result in an increase in the value of that land to constitute an improvement on the land. It is sufficient that what was done has made the land more useful to an occupier.

Paragraph 23 of GSTR 2006/6 explains that where there have been a number of human interventions on the land, it is necessary to establish whether any of the human interventions enhance the value or usefulness of the land at the relevant date. If any of the human interventions located on the land enhance its value or usefulness at the relevant date, then there are improvements on the land. Whether the net value of the human interventions enhance the overall value of the land is irrelevant.

Paragraph 24 of GSTR 2006/6, states that whether a human intervention enhances the value or usefulness of the land is an objective test. This means that whether an intervention enhances the value or usefulness should not be determined by reference to actual, or intended, use by a specific occupier. Rather, a comparison should be made between the value of usefulness of that land in its natural state and its value or usefulness at the time provided for at the relevant day, to any potential occupier.

That is, an objective view of whether any of the human interventions would be of value or usefulness to anyone, for any purpose whatsoever, is necessary in order to correctly establish whether there are any improvements on the land. The intended or subjective use of a particular person, including the notion of 'highest and best use' is irrelevant.

The relevant day

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.'

Accordingly, the relevant day in Entity A's circumstances is the date that the Crown Lease for the Land was granted to the developer, which is a specified date. As explained at paragraph 20 of GSTR 2006/6, the state of the land to be supplied on that day is to be compared with that same land as it existed in its natural state.

Natural state of the Land

The Land is located at a specified location. It is likely that in its natural state, the Land was covered in native vegetation.

Human interventions

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

Applying the principles from GSTR 2006/6 to your situation and objectively comparing the state of the Land as at the relevant day to what would have been its natural state, it is clear that at the relevant day the Land had been cleared of natural vegetation, it had been filled and levelled, boundary fencing had been erected and excavation and removal of contaminated soil had commenced.

Although the need for remedial work to remove contaminated soil may reduce the value of the reclaiming, filling and levelling undertaken, it does not extinguish the benefit. Therefore, the clearing, filling and levelling of the Land each constitute human interventions that enhance the value or usefulness of land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

It follows that in this case, as at the relevant day, there had been human interventions physically located on the Land and these interventions enhanced the value or usefulness of the Land in comparison to its natural state. Accordingly, as explained at paragraph 20 of GSTR 2006/6, we consider that there were improvements on the Land as at the relevant day.

Since the Land is not land on which there are no improvements, the requirements of section 38-445 are not satisfied and the supply of the Land from Entity A to the developer is not GST-free. The supply is a taxable supply where the requirements of section 9-5 are met.

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