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Ruling

Subject: GST and improved land and the margin scheme

Question 1

Are the following characteristics of the Land, improvements for the purposes of subsection

75-10(3) item 4 and subdivision 38-N of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

a. Crops;

b. Drainage paths; and

c. Fencing.

Answer

No

Question 2

Where the Land did not contain improvements as at 1 July 2000, assuming you and the purchaser agree to apply the margin scheme for the purposes of calculating the amount of goods and services tax (GST) payable, will the margin be determined in accordance with Item 4 of the table in subsection 75-10(3) of the GST Act?

Answer

Yes

Question 3

Where the Land does not contain improvements at the time of a future supply by you, will the supply be GST-free pursuant to subdivision 38-N of the GST Act?

Answer

Yes

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.

· You are an elected body that is responsible for local government pursuant to an Act

· You are governed by an Act (the relevant Act) and may only do something which the State can validly do.

· You are planning to develop a parcel of land which you own (the Land).

· The Land is located within a developing residential area. Surrounding development comprises:

o Residential estates;

o Agricultural land;

o A creek estuary and low lying wetlands; and

o Sewerage treatment works.

· The Land is irregular shaped property which consists of near level and low lying land.

· Some stock fencing exists along the western boundary and some timber paling fencing along the northern boundary. Of note is the timber paling fencing has only formed part of the Land following the amalgamation of an adjoining lot. Such amalgamation did not occur until 2006. Therefore, this fencing did not form part of the Land as at 1 July 2000.

· You purchased two lots and the acquisition settled in 1998.

· The original owners had a house on the property, but prior to settlement in 1998 it was demolished.

· The Land was purchased as you had a number of infrastructure items through it (sewerage main, drainage paths), and at the time you were also looking for road widening (which occurred prior to transfer).

· Following the acquisition of the Land, you immediately leased the Land back to the prior owners for continuation of a farming enterprise. Farming continued on the Land at least until late 2006. There are now cattle grazing on the Land (intermittently).

· In 2006, the two lots were cancelled and the Land became one (1) parcel of land, the new plan also confirmed easements for existing infrastructure.

· There was an old road reserve adjacent to the lot that ran between the lot and the adjoining residential subdivision. It was never used on that alignment and was causing problems with neighbours. It was cancelled by you in 2006.

· You have provided a copy of the survey plan and Aerial views of the land taken in 1999, 2004 and 2009.

· You have provided a valuation of the land from a recognised valuer which has considered whether the land is "land on which there are no improvements" which provides that the land is unimproved land for the purposes of the GST Act.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Subdivision 38-N

Section 38-445

Division 75

Section 75-5

Section 75-10

Subsection 75-10(3)

Reasons for decision

Issue 1

Question 1

Summary

Crops, drainage paths; and fencing are not improvements on the land for the purposes of the GST Act in your circumstances.

Detailed reasoning

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

GSTR 2006/6 states:

20. Unimproved land is taken to be land in its natural state. Thus, to establish whether there are improvements on the land for the purpose of these provisions, the land is compared with land in its natural state.

The meaning of 'improvements on the land'

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'.

22. 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.

23. Where there has 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.

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'. For item 4 of the table in subsection 75-10(3) the relevant day for ascertaining whether there are improvement on the land is 1 July 2000. Both of these relevant dates are considered below.

The issue of when the supply is made is further explained in Property and Construction Industry Partnership - Issues Register - Section 15 - Sale of real property (P & C Issues Register) which provides that 'made available to the recipient' means the time of settlement of the sale contract. This is because it is at this time that equitable ownership and possession of the property transfers to the recipient and the recipient has full use and enjoyment of the property.

Issue 15.4.14 of the P & C Issues register states:

...Under section 6(3) of the Transition Act, the time of the supply of real property is when it is made available to the recipient. Real property takes the same meaning in the Transition Act as that given in the GST Act. Section 195-1 of the GST Act defines real property to include:

(a) any interest in or right over land

(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...

1. Sale of land or buildings

The real property here is the freehold interest in land. We consider the property to be made available when the freehold interest in the property is made available, that is, at the time of settlement of the sale contract.

In your case you advise that certain crops were grown on the Land at least until late 2006. As a result, crops are likely to have been located on the land at 1 July 2000. The growing of crops involves human intervention on the land. However, these crops can only constitute 'an improvement' if the crops enhanced the value of the land.

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

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

· commercial and industrial premises;

· 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;

· 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;

· clearing of timber, scrub or other vegetation;

· excavation, grading or levelling of land;

· drainage of land;

· building up of soil fertility;

· removal of animal pests, rabbit burrows etc;

· removal of rocks, stones or soil; and

· filling of land.

From the examples provided above fencing and drainage of land are indicated as examples of human intervention and thus may be considered improvements on land.

However, paragraph 36 of GSTR 2006/6 states:

36. As the issue of whether there are improvements on the land is a question of fact, it may be prudent to engage a professional valuer to establish this.

You have provided a valuation of the land from a recognised valuers which has considered whether the land is "land on which there are no improvements" which provides that the land is unimproved land for the purposes of the GST Act.

Based on this valuation and the guidance provided by GSTR 2006/6, we accept that in these circumstances the crops, drainage paths; and fencing are not improvements on the land for the purposes of the GST Act at the relevant dates (at 1 July 2000 and at the time the supply will be made). That is, they are not improvements for the purposes of subsection 75-10(3) item 4 and subdivision 38-N of the GST Act.

Question 2

Summary

As the Commissioner accepts that Councils are a State you can apply item 4 of Section

75-10(3) (b) of the GST Act.

Detailed reasoning

The Commonwealth, a State or a Territory is not defined in the GST Act. Goods and Services Tax Ruling GSTR 2006/5, Goods and services tax: meaning of 'Commonwealth, a State or a Territory' (GSTR 2006/5) discusses the meaning of 'Commonwealth, a State or a Territory' for the purposes of certain provisions of the GST Act, including section 38-445 of the GST Act -Grants of freehold land and similar interests by governments.

GSTR 2006/5 further states:

6. The Commissioner considers that the Commonwealth, a State or a Territory includes a department, agency or organisation of the type referred to in the definition of 'government entity' in section 195-1.

7. Section 195-1 adopts the meaning of 'government entity' given by section 41 of the A New Tax System (Australian Business Number) Act 1999. This means that the Commonwealth, a State or a Territory, as the case may be, includes any of the following:

(a) a Department of State of the Commonwealth;

(b) a Department of the Parliament;

(c) an Executive Agency, or Statutory Agency, within the meaning of the Public Service Act 1999;

(d) a Department of State of a State or Territory; and

(e) an organisation that:

(i) is not an entity;² and

(ii) is either established by the Commonwealth, a State or a Territory

(whether under a law or not) to carry on an enterprise or established for a public purpose by an Australian law; and

(iii) can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation;

whether or not the organisation is part of a Department or branch described in paragraph (a), (b), (c) or (d) or of another organisation of the kind described in this paragraph.

GSTR 2006/5 also explains that the Commonwealth, a State or a Territory is not limited to the departments, agencies and organisations described at paragraph 7 and may include a corporation which is not a 'government entity' as defined in section 195-1 of the GST Act. The fundamental principle established by the court cases is that, if the corporation is discharging governmental functions for the State, that is, the State is carrying on the relevant business or other function through the corporation, then the corporation is the State. On the other hand, if the intention is for the corporation to perform its functions independently of, and not as an instrument of, the State (so that the concept of a State activity cannot be realistically applied to that which the corporation does) then the corporation is not the State (see paragraphs 8-11 GSTR 2006/5).

On 18 March 2011, the Federal Court of Australia made orders in the matter of Melton Shire Council v Commissioner of Taxation, FCA reference No: (P) VID1167/2010. The order relevantly provided for:

"1. A declaration that the Applicant is a 'State' for the purposes of s 114 of the Commonwealth Constitution.

2. A declaration that, by reason of s5 of the A New System (Goods and Services Tax Imposition-General) Act 1999 (Cth), no tax payable under the GST law (within the meaning of the A New Tax System (Goods and Services Tax) Act 1999) is imposed on property of any kind belonging to the Applicant."

Since the Melton consent order was made the Commissioner has made amendments to GSTR 2006/5, confirming that a local government may be a state for the purposes of the GST Act. The principles developed by the High Court of Australia in cases concerning the meaning of 'a State' in the Constitution also apply in determining whether a particular local government is a 'State' or 'Territory' for the purposes of the GST Act.

Following is an extract from paragraph 15E of GSTR 2006/5:

"the principles for determining whether an agency or instrumentality represents the 'Crown' and has been endowed with the privileges and immunities of the 'Crown' for a particular purpose are different to the principles applied to determine whether a body is a 'State' for the purposes of section 114 of the Constitution. 28 Therefore, a local government that does not share the immunities of the Crown may, nevertheless, be the State for the purposes of section 114 of the Constitution and may, similarly, be the State or Territory for the purposes of the GST Act."

The legislation constituting a particular local government may be considered to determine whether it is a State. Factors such as the power delegated to you by State legislation which allows you to levy rates may also be determinative factor in deciding that you are the State.

In your circumstances you are controlled by the State and must act solely in the interests of the State.

A particular Act requires there be a system of local government consisting of a number of local governments. Each local government is to be an elected body that is responsible for the good rule and local government of an area of the State which it is allocated. Local government areas are determined by the Executive Government of the State under a particular Regulation.

The powers and responsibilities of a local government are set out in relevant Act. Although a local government is empowered to do anything that is necessary for the good rule and local government in its area, pursuant to a section of the relevant Act a local government can only do something which the State can validly do.

The relevant Act provides:

· All local laws (subject to certain exceptions) proposed by a local government must be referred to the responsible Minister for consideration of whether the law is consistent with the overall State interest.

· The responsible Minister has the power to suspend or revoke a decision, or any part of a decision (including the proposal of local law) made by a local council where the Minister reasonably believes that the decision is contrary to any law or inconsistent with the local government principles set out in section of the relevant Act; and

· The responsible Minister has the power to recommend to the Governor in Council that a councillor be suspended or dismissed and that a local government be dissolved.

All of these factors indicate that you are controlled by the State and must act solely in the interests of the State.

From an administrative perspective, and for compliance purposes, the ATO accepts that local government bodies established under the relevant Act are the 'State' or 'Territory' for the purposes of section 38-445 and section 75-10 of the GST Act.

As the Commissioner accepts that you are a State then you can apply item 4 of Section

75-10(3)(b) of the GST Act .

We would anticipate that this provision may be used where the Land contains improvements (such as any further development) at the time of a future supply by you.

This advice also relies on an assumption that you agree with the purchaser to apply the margin scheme, meeting all the requirements for doing so.

Where the future supply of the land by you does not contain any further development or improvements please refer to our reasoning for question 3.

Question 3

Summary

The supply of the lot will be GST-free 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

The status of the lot as improved or unimproved land is determined at the time the lot is supplied. Until that time the Land may be either improved or unimproved land, depending on its physical state.

You have advised that the particular lot will have no improvements when supplied.

Subdivision 38-N of the GST Act deals with 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.

For the sake of completeness, we note that the amalgamation of the lots that you have undertaken is not a supply.

As no previous supply of the lot has been made by you since 1 July 2000, and the lot will contain no improvements at the time of supply, the supply will be GST-free pursuant to subdivision 38-N of the GST Act

Where the supply is not GST-free under this provision (for example if a supply has already been made since 1 July 2000 or there are improvements on the land), as considered above the amount of GST on a taxable supply of the land can be worked out using a valuation to work out the margin under item 4 of Section 75-10(3) (b) of the GST Act.