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Ruling

Subject: GST and GST-free supplies

Question 1

Is the supply of the Land from the Entity A to Entity B GST-free under section 38-455 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Does section 105-65 of schedule 1 to the Taxation Administration Act 1953 (TAA) apply to restrict the refund on overpaid amount of GST because Entity A and Entity B incorrectly treated the supply of the Land as taxable and applied the margin scheme?

Answer

No.

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.

During 2010, Entity A (vendor) and Entity B (purchaser) entered into a contract for the sale of the Land.

The contact provided, amongst other things, that:

§ the agreed sale price plus GST,

§ the parties treated the supply at the time as taxable,

§ the parties agreed in writing to apply the margin scheme,

§ that Entity B would pay the GST amount.

Entity A obtained a margin scheme valuation who concluded that the 1 July 2000 value of the Land for the margin scheme of a particular amount.

Entity A remitted GST in respect of the sale in its Business Activity Statement (BAS).

Entity A held the Land since before 1 July 2000.

There have been no other sales or transfers of the Land since 1 July 2000.

The Land is currently vacant and contains no structures. This was confirmed by a site visit conducted by a certified professional valuer. The site visit also confirmed that although the Land was cleared at some stage previously, the Land is now overgrown with native vegetation. In addition, there is some building debris, cracked concrete slabs and overgrown bitumen paved areas throughout the Land.

The valuer concludes that the Land is land on which there are no improvements for the purposes of section 38-445 of the GST Act as at the date of settlement.

The Valuation Report also states that electricity, mains water, telecommunication services, mains sewer and gas are all available to the Land. It has been confirmed that these services run to the boundary of the site and that infrastructure needs to be put in place to connect these services on the Land.

Assumption

As the margin scheme was applied, Entity B as the recipient of the supply would not have claimed input tax credits on acquiring the Land.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5 and section 38-445.

Taxation Administration Act 1953 schedule 1 section 105-65

Reasons for decision

Question 1

Summary

The supply of the Land from Entity A to Entity B is GST-free under section 38-455 of the GST Act. As it is a supply by the State, there are no improvements on the Land and the Land was not previously supplied as GST-free.

Detailed reasoning

Section 38-445 of the GST Act 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.

Entity A is a State Department hence the supply is by the State.

Entity A has stated that the Land has not been subject to a GST-free supply under section 38-445 since 1 July 2000.

Therefore we need to determine if the supply of the Land was such that there were no improvements on the Land when the supply was made.

The test of whether there were improvements on the land as 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.

According to paragraph 22 of GSTR 2006/6 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 23 of GSTR 2006/6 provides 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 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.

Paragraph 25 of GSTR 2006/6 provides examples of human interventions that may enhance the value of land some of which are as follows:

§ 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, and

§ filling of land.

From the information provided it is clear that previously a large amount of fill was placed on the land, that retaining walls were erected, the land was fenced and electricity, mains water, telecommunication services, mains sewer and gas were all available to the Land.

These are considered human intervention that may enhance the value of the land. However, you have engaged a professional valuer to establish whether the human intervention did in fact enhance the value of land and the valuer found that they did not. Furthermore, the services only run to the boundary of the site and infrastructure would be required to be put in place to connect these services on the Land. This means that more improvements would need to be done for the services to be available for connection. As such the Land is land on which there are no improvements and the supply of the Land from Entity A to Entity B is GST-free pursuant to section 38-455 of the GST Act.

Question 2

Summary

Section 105-65 of schedule 1 to the TAA does not apply in Entity A's situation.

Detailed reasoning

The ATO has recently reviewed the view in MT 2010/1 and now takes the position that section 105-65 of schedule 1 to the TAA regarding restrictions on GST refunds may not apply where a taxpayer overpays GST as a result of miscalculating their liability under the margin scheme. The ATO will now administer section 105-65 of schedule 1 to the TAA as if it does not apply in these circumstances.

In Entity A's circumstances the supply of the Land was mistakenly treated as taxable and the margin scheme applied resulting in a miscalculation of Entity A's liability under the margin scheme as the supply was not a taxable supply but GST-free.

Therefore, Entity A can revise its BAS which included the amount of GST on the margin on the supply of the Land to Entity B, to correct the amount mistakenly included in the BAS as a GST liability.