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Ruling

Subject: GST and application of the margin scheme

Question 1

Are you eligible to use Item 4 of the table to subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when using the margin scheme to calculate GST payable on the identified lots sold under the Project?

Answer

Yes, subject to you obtaining an approved valuation within 4 months of the date of this private ruling.

Question 2

Is your proposed valuation methodology to determine the 'unimproved' value of the land as at the date of sale considered to be an 'approved valuation' for the purpose of subsection 75-10(3) of the GST Act?

Answer

Yes

Question 3

If the answers to questions 1 and 2 are yes, are you entitled to a refund of the amount of GST overpaid?

Answer

Yes, subject to you claiming the GST refund or credit within 2 months of the date of obtaining the valuation referred to at question 1.

Relevant facts and circumstances

You are an organisation which manages a significant portfolio of land assets on behalf of the government, including the identified land.

You sold most of the land to purchasers (mainly residential) using the margin scheme, and where applicable, use of the margin scheme has been agreed between the parties under the sale contract.

The sale price for each residential allotment was determined in accordance with reference to the market conditions existing during each stage release as well as taking into account Government policy regarding affordable housing. That is, in setting these prices no regard was given to the amount of GST that would ultimately be included in the final sale price (and therefore paid by the purchaser).

GST on sales of the identified land was calculated and remitted to the Australian Taxation Office ("ATO") by you using the margin scheme, being 1/11th of the 'margin', calculated as the difference between the sale price and the value of the property as at 1 July 2000.

You have reviewed your eligibility to use Item 4 of the table to subsection 75-10(3) of the GST Act when using the margin scheme to calculate GST payable on the identified lots sold under the Project to your earlier sales of the land for earlier periods.

You currently have until a specified date to lodge the GST refund claim (if any).

You have commissioned a licensed valuer to undertake an assessment of the above.

The methodology followed, and on which a private ruling is requested, is discussed in detail below.

Based on the guidance provided by GSTR 2006/6, the professional Valuer adopted the following procedure to determine whether there were 'improvements on the land' as at 1 July 2000.

The location of each of the (identified on appropriate plans etc) was determined.

Detailed base plans, provided by you have been analysed by the Valuer to determine whether any 'improvements' appeared to be in existence on these allotments as at 1 July 2000.

Based on this, the Valuer has determined that:

· There were no building improvements on any of the allotments (even on the date of sale).

· For some of the allotments there could potentially have been 'improvements', being human intervention that adds value, on the land including:

o Clearing of site vegetation;

o Addition of fill (or cut and fill);

o Compaction or other site works;

o Service connections (on site only); or

o Fencing or other improvements.

Due to the cost of determining whether there actually were any improvements on this part of the land, the valuer is adopting a conservative position that this part of the land contained improvements.

Accordingly, you have determined that you were not eligible to use Item 4 of the table to subsection 75-10(3) of the GST Act when using the margin scheme to calculate GST payable on the identified lots derived from this part of the land.

You advised that the remaining land did not have any improvements. Your representative advised that although there may have been some historical human intervention by way of cropping and grazing activities, any improvements required to facilitate this no longer added value to the land as at 1 July 2000.

Therefore, you have concluded that these allotments did not have any improvements as at 1 July 2000.

To determine the value of the individual allotments as at the date of supply, you propose to use a professional valuer.

You will ensure that:

· The Valuer is a 'professional valuer' on the basis that the Valuer is an accredited Certified Practising Valuer and a member of the Australian Property Institute.

· The valuation will be obtained in writing.

· The valuation will determine the market value of the relevant interest.

· The valuation will be made in a manner that is not contrary to the professional standards recognised in Australia for the making of real property valuations.

· The valuation will include a signed certificate which specifies:

o A full description of the property being valued;

o The application valuation date;

o The date the Valuer provides the valuation to the supplier;

o The market value of the property at the valuation date;

o The valuation approach and the valuation calculation; and

o The name and qualification of the Valuer.

· In determining the unimproved value of the individual allotments, the valuer will use a methodology that includes consideration of the following factors:

o The sale price of the allotment

o Less expenses, including:

o Sales costs

o Legal fees

o Development costs

o Profit margin

o Contingency allowance

o Finance costs

o Other holding costs

o Any other matters the valuer considers relevant.

As the due date for making this valuation has passed, you request that the Commissioner allow you an extension of time (allowing 4 months from the date of the issue of the private ruling) to obtain a written valuation.

You have made the request that the Commissioner exercises his discretion to allow additional time to obtain a valuation for purposes of application of the GST margin scheme, in particular Item 4 of the table in subsection 75-10(3), on the basis that you mistakenly believed you had already obtained a valuation. Specifically, you obtained a valuation within time for purposes of Item 3. However, this valuation is not appropriate for Item 4, as the 'day when the valuation is to be made' is different for the two items.

You notified us on a particular date that you were entitled to a refund or credit for GST that you overpaid for the earlier tax periods. This was a consequence of using item 3 (instead of item 4) of the table to subsection 75-10(3) of the GST Act, when calculating the margin on your supplies of the identified properties.

As the due date for lodging your GST refund claim has passed, you request that the due date be extended to 6 months from the date of issue of the private ruling.

Relevant legislative provisions

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

Taxation Administration Act 1953 section 105-55

Taxation Administration Act 1953 section 105-65

Reasons for decision

Question 1

Margin scheme

Are you eligible to use Item 4 of the table to subsection 75-10(3) of the GST Act when using the margin scheme to calculate GST payable on the identified lots sold under the Project?

Under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the margin scheme applies in working out the amount of GST payable on a taxable supply of real property if:

o the supplier and the recipient of the supply agree in writing that the margin scheme is to apply, and

o the agreement to use the margin scheme is made on or before the making of the supply, or within such further period as the Commissioner allows, and

o the supplier did not acquire the freehold interest through a supply that was ineligible for the margin scheme.

Subsection 75-5(3) of the GST Act states the circumstances under which a supply is ineligible for the margin scheme. On the facts provided, none of the exceptions in section 75-5(3) of the GST Act apply in your circumstances.

As provided in section 75-10 of the GST Act, the margin on your supply will be the difference between the consideration for supply and either (1) your consideration for your acquisition of the interest, unit or lease in question (the consideration method) or (2) the value of the interest, unit or lease in question as determined by an approved valuation (the valuation method). You have chosen to use the valuation method.

The table in subsection 75-10(3) of the GST Act specifies the date when valuations are made. In your circumstances, the relevant items are:

o Item 3 - this states that, for improved property in certain circumstances, the date when the valuation is to be made is 1 July 2000, or

o Item 4 - this states that, for unimproved property in certain circumstances, the date when the valuation is to be made is the day on which the taxable supply takes place.

You have identified allotments that you consider did not have any improvements as at 1 July 2000.

The Commissioner has provided clarification on the meaning of the phrase 'no improvements on the land' in Goods and Services Tax Ruling 2006/6 improvements on the land for the purposes of Subdivision 38-N and Division 75 (GSTR 2006/6).

Paragraph 21 of GSTR 2006/6 explains that any operation of man on land which has the effect of enhancing its value is an improvement.

Paragraph 22 of GSTR 2006/6 further explains that for there to be improvements on the land:

o there must have been some human intervention;

o the human intervention must have been physically located on the land; and

o that human intervention must enhance the value of the land at the relevant date3 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. These include:

o houses, town-houses, stratum units, separate garages, sheds and other out-buildings;

o commercial and industrial premises;

o farm houses, farm outbuildings, internal fencing, stockyards, wells and bores, excavated tanks, dams, surface drains, culverts, bridges, sown pasture, formed internal roads, and irrigation layouts;

o formed driveways, swimming pools, tennis courts, and walls;

o any other similar buildings or structures;

o fencing - internal or boundary fencing;

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

o clearing of timber, scrub or other vegetation;

o excavation, grading or levelling of land;

o drainage of land;

o building up of soil fertility;

o removal of animal pests, rabbit burrows etc;

o removal of rocks, stones or soil; and

o filling of land.

Paragraphs 28-30 of GSTR 2006/6 explain that, in some circumstances, human interventions that were once improvements may have deteriorated over time such that they no longer enhance the value of the land, or may no longer exist.

You advised that although there may have been some historical human intervention by way of cropping and grazing activities on the allotments under consideration, any improvements required to facilitate this no longer added value to the land as at 1 July 2000.

On this basis, we concur with your conclusion that the allotments did not have any improvements as at 1 July 2000.

You are for the purposes of subsection 75-10(3) of the GST Act, a State of Australia.

Accordingly, the allotments were land supplied by a State which held the interest in the land before 1 July 2000, and on which there were no improvements as at 1 July 2000. Therefore the appropriate item in the table in subsection 75-10(3) of the GST Act is item 4 and the date when the valuation was required to be made was the date of supply of each of the lots.

You did not obtain a valuation as at the date of supply.

Under section 75-35 of the GST Act, the Commissioner may, by legislative instrument, determine in writing the requirements for making valuations for the purposes of Division 75 of the GST Act.

The Commissioner has made two such determinations:

§ A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3 (MSV 2005/3), for calculating the margin for taxable supplies of real property made on or after 1 December 2005, and

§ A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 (MSV 2009/1), for calculating the margin for taxable supplies of real property made on or after 1 March 2010.

Under these determinations, a valuation must be made by the due date for lodgment of your activity statement for the tax period to which the GST on the supply is attributable, unless for good reason the Commissioner allows an addition period of time to make the valuation.

Where a valuation is not undertaken within the time specified in paragraphs 18 and 23 of MSV 2005/3 and MSV 2009/1 respectively, the Commissioner may allow, for good reason, an additional period to obtain a valuation.

Paragraph 8 of Practice Statement Law Administration PS LA 2005/16 provides guidance on the circumstances that the Commissioner will consider in determining whether to allow a further period to obtain an approved valuation. Circumstances where the Commissioner considers as good reason for allowing further time to obtain a valuation include where genuine mistakes are made with respect to the valuation already made.

You mistakenly applied Item 3 of the table to subsection 75-10(3) and obtained a valuation within time for purposes of Item 3. You subsequently became aware that the appropriate item was item 4 and that the valuation that you obtained for the purposes of Item 3 was not appropriate for Item 4, as the 'day when the valuations are to be made' is different for the two items.

The Commissioner accepts that this is a genuine mistake and will allow you a further period to obtain an approved valuation. Given that you have a large number of properties for which you have to obtain valuations, the Commissioner extends the period in which to obtain approved valuations for the properties in Schedule 1 to 4 months from the date of this private ruling.

Subject to you obtaining the valuation within this additional time period, you are eligible to use Item 4 of the table to subsection 75-10(3) of the GST Act when using the margin scheme to calculate GST payable on the identified lots sold.

Question 2

Valuation methodology

Is your proposed valuation methodology to determine the 'unimproved' value of the land as at the date of sale considered to be an 'approved valuation' for the purpose of section 75-10(3) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

For supplies made on or after 1 December 2005 and prior to 1 March 2010, the valuation requirements are detailed in MSV 2005/3. For supplies made on or after 1 March 2010, the valuation requirements are detailed in MSV 2009/1. Paragraphs 8 to 9 and paragraph13 of MSV 2005/3 and MSV 2009/1 respectively explain that a valuation by a professional valuer is (subject to the valuation meeting certain requirements) an acceptable method of determining the market value of the real property at the valuation date.

Paragraph 30 of Goods and Services Tax Ruling GSTR 200/21: the margin scheme for supplies of real property held prior to 1 July 2000 (GSTR 2000/21) details the matters to be considered by a professional valuer in undertaking the valuation of a land subdivision that is partly completed as at the valuation date.

30. Where the property to be valued consists of a land subdivision or land and buildings that are partly completed as at the valuation date, then the valuer should undertake the valuation having regard to:

(a) the market value of the completed land subdivision, or land and buildings;

(b) the cost to complete the project; and

(c) the profit margin and holding costs that are attributable to the period on or after the valuation date.

The methodology proposed by the professional valuer, as set out in the facts satisfies the requirements set out in MSV 2005/3, MSV 2009/1 and GSTR 2000/21.

Question 3

Refund

If the answers to questions 1 and 2 are yes, are you entitled to a refund of the amount of GST overpaid?

Paragraphs 7 to 9 of Miscellaneous Taxation Ruling MT 2010/1: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1) explain the Commissioner's general obligation to issue refunds arising from a taxpayer amending their net amount of GST payable.

As explained in paragraph 10 of MT 2010/1, this requirement to give a refund is modified by section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

10. However, where the refund or credit arises from an overpayment of the amount of GST payable in the calculation of the net amount, subsection 105-65(1) modifies this requirement so that the Commissioner need not give a refund (or apply that amount) where the entity overpaid its net amount or an amount of GST and the other requirements of the section are established.

The Commissioner takes the view that section 105-65 does not apply where the supply is always correctly treated as a taxable supply but an overpayment of GST arises from a mere miscalculation, such as where the margin for a supply is miscalculated.

84. The Commissioner takes the view that section 105-65 will not apply in cases where:

· supplies are treated as taxable under the margin scheme where there was an error in the calculation of the margin; or

· GST on supplies of real property has been calculated under the ordinary provisions when in fact the margin scheme applied.

As a consequence of applying item 3 of the table to subsection 75-10(3) when the appropriate item was item 4, you have miscalculated and overstated your GST payable on the supply of the properties. Therefore, subject to section 105-55 of the TAA, you are entitled to a refund of your overpaid GST.

You notified us within the required time that you were entitled to a refund or credit for GST that you overpaid for the earlier tax periods. This was as a consequence of using item 3 (instead of item 4) of the table to subsection 75-10(3) of the GST Act, when calculating the margin on your supplies of the properties.

Therefore, if as a consequence of applying item 4 of the table to subsection 75-10(3), it is established that you have overpaid GST on the supply of the properties; you will be entitled to a refund of your overpaid GST.

We expect that you will claim the GST refund or credit within 2 months of the date of obtaining the valuation referred to at question 1. You can do this by revising the earlier activity statements related to your GST refund or credit.

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