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Ruling

Subject: Supplies of Government Land

Question 1

Are the supplies of land (Lots), described as Class 1 and Class 2, in whole or in part, GST-free supplies under section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supplies of the Lots are supplies of freehold interest in land on which there are improvements. The supplies are not GST-free under section 38-445 of the GST Act. The supplies are subject to GST.

Question 2

If the Lots are not GST-free under section 38-445 of the GST Act, are the supplies of the Lots supplies of land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act?

Answer

Yes. The Lots are land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act.

Relevant facts and circumstances

You are a State Government Statutory Body established under legislation (the Act).

You have been registered for Goods & Services Tax (GST) from 2007.

Pursuant to the Act, you represent the State. Accordingly, a supply of land by you will be a supply of land by 'the State' for the purposes of Subdivision 38-N and Division 75 of the GST Act.

Pursuant to the Act, you have the power to acquire unallocated State land, as defined under the Land Act, by way of gazette notice. The vesting of the Land to you will not give rise to any supply for GST purposes.

Your main purposes include the facilitation of the following within declared urban development areas (UDA):

· Availability of land for urban purposes;

· Provision of a range of housing options to address diverse community needs;

· Provision of infrastructure for urban purposes;

· Planning principles that give effect to ecological sustainability and best practice urban design; and

· Provision of an ongoing availability of affordable housing options for low to moderate income households.

You are to develop certain parcels of land which have been declared as UDA by a Gazette Notice. The Land is currently held by another Department. That Department has held the land in question since before 1 July 2000.

The Land will comprise Lots to be sold for the construction of a diverse range of dwellings, including dwellings which are affordable to low to moderate income households.

The Land is adjacent to a residential property development and some sporting fields. There are currently no permanent structures on the Land. The only identifiable 'features' of the land are:

· Dirt tracks which have to been created naturally (through wear) as a result of use of the land by the adjoining landowners;

· Two drainage channels, which have been formed naturally as a result of soil erosion from stormwater discharge from town drainage infrastructure; and

· A single power line that crosses the Land from east to west (which will be removed well before the date the Land is supplied); and

· Two small unauthorised dams that have been constructed on the properties (or more correctly, one dam on the property and one that slightly encroaches across the boundary from the adjacent landowners' property).

An aerial view of the land was provided as Attachment B. A contour and detail survey map was also provided as Attachment C.

You will undertake certain works on the land, including:

1. the construction of roads within the estate,

2. the installation of water supplies;

3. the installation of power supplies;

4. the construction of sewerage networks

You consider the Land can be separated into two distinct classes for the purposes of this application; Classes 1 and 2.

Class 1: Unimproved land

Class 1 includes all Lots that possess the following characteristics:

· The only identifiable features on the Lot are the dirt tracks, the dams and/or the drainage channels (if any);

· There are no power poles installed on the Lot (even if power lines occupy part of the space above the property);

· There have been no development works undertaken on the Lot (even if the development of adjacent land has enhanced the value of the Lot); and

· There have been no clearing works undertaken on the Lot.

You consider that the Lots in Class 1 will be undeveloped for GST purposes as at the date of supply, and will be eligible for GST-free treatment under Subdivision 38-N of the GST Act.

Class 2: Land improved after 1 July 2000

Class 2 includes all Lots that possess the following characteristics:

· The only identifiable features that existed on the Lot as at 1 July 2000 were the dirt tracks, the dams and/or the drainage channels (if any); and

· Development works or clearing works have been undertaken on the Lot since 1 July 2000.

You consider that the Lots in Class 2 will be eligible for concessional GST treatment under Division 75 of the GST Act.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9

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

A New Tax System (Goods and Services Tax) Act 1999 Division 38

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

A New Tax System (Goods and Services Tax) Act 1999 Division 75

A New Tax System (Goods and Services Tax) Act 1999 Section 75-10

Reasons for decision

Question 1

Are the supplies of land (Lots), described as Class 1 and Class 2, in whole or in part, GST-free supplies under section 38-445 of the GST Act?

Summary

No, the supplies of the Lots are supplies of freehold interest in land on which there are improvements. The supplies are not GST-free under section 38-445 of the GST Act. The supplies are subject to GST.

Detailed reasoning

The application deals with transactions of real property.

Real property is defined for GST purposes under Section 195-1 as including:

(a) any interest in or right over land; or

(b) a personal right to call for or be granted any interest in or right over land; or

(c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

Land is defined in the Acts Interpretation Act 1901 under subsection 22(1) as follows:

(a) Land shall include messuages tenements and hereditaments, corporeal and incorporeal, of any tenure or description, and whatever may be the estate or interest therein;

Estate is defined as:

(b) Estate shall include any estate or interest charge right title claim demand lien or incumbrance at law or in equity;

Essentially, the supplies under consideration are bundles of recognisable, enforceable legal rights relating to land. In particular, supplies of freehold interests in land subdivided from a larger area being those estates that are defined in the facts as Class 1 and Class 2 lots.

Whether a supply is taxable, GST-free or input taxed will be determined on whether the supply satisfies the core provisions under Division 9 but is GST-free under Division 38 or input taxed under Division 40.

The supplies would satisfy the positive requirements of section 9-5 of the GST Act.

Subdivision 38-N Grants of land by governments

Section 38-445 of the GST Act relevantly provides that a supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if the supply is of a freehold interest in the land. 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.

The land has been held by the State since before 1 July 2000. The transfer of the land to you will be by way of a machinery of government transfer (Gazette Notice) and not by way of a GST-free supply under section 38-445.

The supplies of lots are supplies by a State.

The issue that arises is whether the lots are 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 (GSTR 2006/6) provides clarification on the meaning of the phrase 'land on which there are no improvements'. Paragraph 21 of GSTR 2006/6 states:

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'.

Paragraphs 48 to 51 of GSTR 2006/6 contain the following:

Subdivided land and item 4 of the table in subsection 75-10(3)

48. In this part of the Ruling, the Commissioner considers whether a supply of a particular subdivided lot is ineligible for consideration under item 4 of subsection 75-10(3) because the larger area (englobo land) from which it was subdivided had improvements on it at 1 July 2000, even though the physical area of the particular subdivided lot had no improvements.

49. The issue is whether it is necessary to consider whether any part of the englobo land had improvements on it or whether regard should be had only to that part of the englobo land that forms the subdivided lot.

50. It is the Commissioner's view that the words 'land or premises in question' in item 4 qualify the application of the improvements test to land that is supplied and not the larger area from which it is subdivided.

51. These words can be contrasted with the expression 'interest, unit or lease' which are used elsewhere in the item to refer to the legal interest being supplied under the margin scheme. This distinction supports the view that it is the physical land rather than the legal interest that is considered when determining whether there were improvements on the land at the relevant date.

Unlike Items 3 and 4 in the table in subsection 75-10(3) of the GST Act, section 38-445 of the GST Act does not contain the qualification 'land or premises in question'. Section 38-445 instead refers to 'land on which there are no improvements'.

The land held prior to July 2000 was the englobo land which we agree was unimproved at that time. This land had to be developed before the subdivision of the land could be completed. In Brisbane City Council v. Valuer-General (Queensland) [1978] HCA 40, 140 CLR 41, 21 ALR 607, Gibbs J, with whom all puisne Judges agreed, noted at HCA 47:

These provisions make it necessary to determine for valuation purposes, whether the land in question is improved or unimproved. They also indicate what tests should be applied in deciding what is an improvement for the purposes of the valuation. In the first place, an improvement in relation to land must be "thereon or appertaining thereto". This means that the improvements, if not on the land, must be "such as are in the strict legal sense 'appurtenant' to the property and incident to its ownership" (McDonald v. Deputy Federal Commissioner of Land Tax (NSW) (1915) 20 CLR 231, at pp 234-235). Secondly, something done on or appertaining to land which reduces rather than enhances its value is not an improvement for the purposes of the Act, any more than it would be in the ordinary sense of the word. In Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498, at p 503, Griffith C.J. said, in a passage which has frequently been cited: "Any operation of man on land which has the effect of enhancing its value comes within the definition of 'improvement'."

It is our view, based on this and other decisions that development works to provide roads, sewage works and other infrastructure will improve the land. It is not necessary for the works to have occurred on a particular subsequently subdivided Lot, for that lot to be considered improved land.

Improvement also refers to any operation upon the land which makes the use of the land more efficient (see: Dampier Mining Co Ltd v. FCT (1979) 10 ATR 193; (1979) 27 ALR 579).

Paragraph 22 of GSTR 2006/6 provides examples of human interventions that may enhance the value of land. These include:

· fencing - internal or boundary fencing

· utilities, for example, water, electricity, gas, sewerage connected or available for connection;

· clearing of timber, scrub or other vegetation; and

· drainage of land.

Prior to the subdivision of the land and sale of the lots, you will undertake certain works on the land, including:

· the construction of roads within the estate,

· the installation of water supplies;

· the installation of power supplies;

· the construction of sewerage networks

These works will enhance the value of the land. The land will be considered to be improved land. The land will no longer be 'land on which there are no improvements'.

The subsequent subdivision of the land into lots will not alter the character of any lot to 'land on which there are no improvements'.

Goods and Services Tax Ruling GSTR 2003/3: Goods and services tax: when is a sale of real property a sale of new residential premises?, at paragraphs 32, confirms that the subdivision of land, of itself, does not create new residential premises. Similarly, subdivision does not create unimproved land.

In our view the supplies of the Lots are not GST-free supplies of freehold interest in land on which there are no improvements. The supplies are not GST-free under section 38-445 of the GST Act.

Question 2

If the Lots are not GST-free under section 38-445 of the GST Act, are the supplies of the Lots supplies of land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act?

Summary

Yes. The Lots are land on which there were no improvements as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the GST Act.

Detailed reasoning

As at 1 July 2000, the land was held by the State. The Land was and still is adjacent to a residential property development and some sporting fields. There are currently no permanent structures on the Land. The only identifiable 'features' of the land are:

· Dirt tracks which have to been created naturally (through wear) as a result of use of the land by the adjoining landowners;

· Two drainage channels, which have been formed naturally as a result of soil erosion from stormwater discharge from town drainage infrastructure;

· A single power line that crosses the Land from east to west (which will be removed well before the date the Land is supplied by you); and

· Two small unauthorised dams that have been constructed on the properties (or more correctly, one dam on the property and one that slightly encroaches across the boundary from the adjacent landowners' property).

The test of whether there were improvements on the land as at 1 July 2000 is provided in paragraph 21 of GSTR 2006/6 as:

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

Generally, easements, restrictive covenants and encroachments would not be considered an improvement where they do not have the effect of enhancing the value of the land.

The dirt tracks and unauthorised dams have resulted from unauthorised entry upon the land the property of the State. In Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503 Griffith CJ stated

'… the term "value of improvements" is defined to mean "the added value which the improvements give to the land at the date of valuation irrespective of the cost of the improvements." It seems plain enough that that means that the value of improvements is the present enhancement of the value of the land attributable to the operations of man upon the land the benefit of which still continues, including also in some cases improvements not actually effected upon the land itself, to which qualification it is not necessary to refer for present purposes.

What operations of man are improvements? When I say "operations of man," I think the term should be limited to what is done by the owner for the time being, … '

The drainage channels, which have been formed naturally, are not caused by the operation of man, particularly not by the owners of the land.

The power line easement is to be removed and the power supply to the land relocated. We accept that the current power lines and easements do not add value to the land.

In our view, none of the above features are improvements on the land for purposes of item 4 of subsection 75-10(3) of the GST Act.