Edited version of private ruling

Authorisation Number: 1011451890206

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Ruling

Subject: GST and sale of land

Questions

1(a) Is the sale of two parcels of land (Lot X and Lot Y) by the Entity A a GST-free supply in accordance with subsection 38-445(l) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

1(b) If the supply of either Lot X or Lot Y (but not both Lot X and Lot Y) are GST-free as per (a) above, is the sale of Lot X and Lot Y separate and distinct supplies for GST purposes?

1(c) If the sale of Lot X and Lot Y is found to be a single supply, is the supply a 'mixed' supply for GST purposes and accordingly, the supply of each Lot will bear its own treatment for GST purposes?

Answers

1(a) No, the sale of two parcels of land (Lot X and Lot Y) by the Entity A is not a GST-free supply in accordance with subsection 38-445(l) of the GST Act.

1(b) Not applicable.

1(c) Not applicable.

Relevant facts and circumstances

Your ruling is based on the following facts.

Overview of the Entity A

The Entity A is a statutory body. The affairs of the Entity A are managed by the chief executive of the state. The Entity A is also subject to the direction and control of the relevant Minister, and can exercise any of the functions of the Department, including acting in its name.

In performing its functions, the Entity A holds land, buildings and various other assets within the Department's portfolio.

The proposed transaction

The Entity A is the owner of two adjacent lots of land, namely Lot X and Lot Y. Both Lots are on their own separate legal title and collectively comprise a land area of approximately Z hectares.

The Department is intending to sell both Lots, almost certainly to a single purchaser.

The Lots have been essentially vacant for a number of years, with the only 'human interventions' physically located on the site at present being as follows:

Lot X -

a. Infrastructure / features which have deteriorated or degraded over time.

b. A structure (Structure) which still serves its intended purpose

Lot Y -

A structure (Structure) which still serves its intended purpose.

Reasons for decision

Summary

The supply of Lot X and Lot Y by the Entity A is not a GST-free supply under subsection 38-445(1) of the GST Act because the lots are not land on which there are no improvements. The improvements include the Structures that are human interventions on the land which from an objective view enhance the value of the land. An assessment that the Structures are detrimental to the value of the land is based on the intended use by the recipient and is not an objective test.

The Structures have not deteriorated or degraded to an extent that they no longer enhance the value of the land.

Detailed reasoning

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.

The first requirement is that the supply of land is by the Commonwealth, State or Territory. Goods and Service Tax Ruling GSTR 2006/5 Goods and services tax: meaning of 'Commonwealth, a State or a Territory' sets out the Commissioner's view of the meaning of 'Commonwealth, a State or a Territory'. At paragraph 12 of GSTR 2006/5 the factors relevant to whether a corporation is discharging governmental functions for the State are considered. The factors include:

· whether a corporation in the State requires consideration of every feature relevant to its relationship with the State (subparagraph a)

· if the corporation is wholly owned and controlled by the State, and must act solely in the interests of the State (subparagraph b)

· whether the state controls the conduct of the affairs of the corporation (subparagraph c)

· the corporation must pursue the interests of the State or the public (subparagraph d)

· the participation of the executive government in formulating policy and making decisions (subparagraph g)

· the absence of corporators (shareholders) (subparagraph i)

· the ability of the executive government to control the appointment and, more particularly, the removal of directors (subparagraph j)

The Entity A:

· is a statutory corporation established and continued under an Act and has no shareholders or members

· has a primary purpose to ensure resources are sufficient to meet public needs

· is subject to the direction of the Minister and is managed by the Chief Executive of the Department

· is required to act in a manner complementary to the Department, and accordingly is acting in the public interest and the State.

The Entity A is therefore considered to be discharging governmental functions for the State and the supply of the Lots by the Entity A is a supply by the State.

The second element of subsection 38-445 of the GST Act which needs to be satisfied is that the supply is of land 'on which there are no improvements'. 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' sets out the Commissioner's interpretation of 'improvements on the land'. At paragraphs 21 and 22 it states:

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'.

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 gives examples of human interventions that may enhance the value of the land. The following list of might be considered human interventions on Lot X and Lot Y:

Lot X:

Infrastructure / features which have deteriorated or degraded over time.

A structure (Structure) which still serves its intended purpose

Lot Y

A structure (Structure) which still serves its intended purpose

Paragraph 28 of GSTR 2006/6 notes that 'human interventions that were once improvements but that have deteriorated over time or have contributed to land degradation, may no longer enhance the value of the land and are not improvements'. That is, the value diminishes over time with deterioration or degradation.

The items listed above (apart from the Structures) may be regarded as having deteriorated or degraded to an extant that they no longer enhance the value of the land.

The Structures on Lot X and Lot Y are human interventions on the land and still perform the intended function. Unlike the items considered above, the Structures have not deteriorated or degraded to lessen their value for the intended purpose. Whether the Structures enhance the value of the Lots requires an objective test as 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.

A conclusion has been reached that because the Structures cannot be removed, this is detrimental to the property's value from a development viewpoint. However, this presupposes a particular use by a purchaser of the land.

Paragraph 35 of GSTR 2006/6 considers who establishes whether there are improvements on the land, and cites this example:

For example, real property with a building on it that is not condemned, enhances the value of the land even though the recipient may intend to demolish the building and construct some other building in its place.

If we were to refer to the intended use or impact the building might have for the recipient, we would conclude that the building does not enhance the value of the land, and if fact may be detrimental when demolition costs are considered. To draw an analogy, the Structures are like the building in the example above, and without reference to anticipated uses or impacts, represent an enhancement to the value of the Lots. Likewise a building may diminish a property's value from a developer's perspective but still enhances the value of the land when viewed objectively.

Since the Lots are not land on which there are no improvements, their supply will not be GST-free under section 38-445 of the GST Act.