Edited version of your private ruling

Authorisation Number: 1012438711721

Ruling

Subject: Request for withdrawal of private ruling and refund of overpaid GST

Question 1

Will the Commissioner withdraw your previous private ruling and confirm that the sale of relevant vacant land was a GST-free supply?

Answer

Yes.

Question 2

Are you entitled to a refund of the overpaid GST on the supply of the vacant land?

Answer

Yes.

Relevant facts and circumstances

· You are registered for GST.

· You are a local government Council.

· The title to certain land vested in you before 1900.

· You subdivided the land into a number of including Lot 2.

· Lot 2 is a landscape conservation area, with a non-engineered stone retaining wall of up to X metres, dating from the Federation period andY mature trees. It includes a grassed area at one end. It has previously undergone quarrying activities many years ago.

· The site contained an easement, for the maintenance and replacement of overhead electricity cables. The establishment of a park on the land was not cost-effective and had risk management and safety issues.

· The land was sold by public auction and a contract signed for the purchase price.

· Settlement under the contract for Lot 2 occurred approximately a number of months later (settlement date).

· You have advised that the purchaser of the land was not registered for GST. The land was sold as a residential block of land.

· You have advised that when the contracts were exchanged you considered that the supply of Lot 2 was GST-free, that the contract price was GST exclusive and that you had no liability for GST on the sale.

· You have provided a copy of the contract exchanged that shows that no GST clauses in the standard contract were selected (no boxes were ticked).

· You did not issue a tax invoice for the transaction and the purchasers did not request one.

· You have advised that it was only after settlement that you considered you had a potential liability for GST.

· At that time you decided to include the proceeds of the sale a GST component , in order to minimise any possible penalties for late payment should the Commissioner conclude that the supply was a taxable supply (which the Commissioner did, please see details below).

· You included GST on the sale of the land in your business activity statement (BAS) for the period in which settlement occurred.

· You have advised that you did not seek to recover an additional amount of GST from the purchaser, and that your anticipated profit on the sale of the lot was reduced.

· You received a legal opinion that indicated that the supply may be GST-free. This advice also recommended that you seek a private ruling from the ATO.

· You have advised that a certified practising valuer reported that Lot 2 was vacant land, and that there were no improvements to or on the land.

· You applied for a GST private ruling after receiving the valuation.

· You received a private ruling which advised that the supply of the land was a taxable supply. Broadly, this ruling considered that your supply of the land was in the course or furtherance of your enterprise. The ruling also found that you were not 'the State' and therefore could not apply section 38-445 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

· You wrote to us seeking a review of the private ruling that we issued. Our decision was affirmed in a review of your private ruling.

· Subsequently, some changes to the ATO view and interpretation in relation to Goods and services tax ruling GSTR 2006/5 (Goods and services tax: meaning of 'Commonwealth, a State or a Territory'). You have therefore asked that your transaction be considered afresh in light of these relevant changes.

· You have requested that if the Commissioner accepts that the supply was GST-free, that relevant amendments be made to your BAS to allow a refund to you.

· You have advised that the amount of the refund that you are requesting.

Relevant legislative provisions

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

Section 9-5

Section 38-445

Taxation Administration Act 1953

Section 8AAZLF

Section 105-65 of Schedule 1

Divisions 3 and 3A of Part IIB

Reasons for decision

Summary

The correct view is that the sale of relevant vacant land is a GST-free supply, as we accept that you are able to rely on section 38-445 of the GST Act (Grants of freehold and similar interests by government).

The Commissioner withdraws your previous private ruling, and replaces it with this ruling.

Detailed reasoning

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act. In particular, this provides that you make a taxable supply if you make the supply for consideration, the supply is made in the course or furtherance of an enterprise that you carry on, the supply is connected with Australia and you are registered or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

As we have considered in the previous private ruling issued to you, the requirements of section 9-5 of the GST Act are all satisfied in your circumstances. Therefore your supply of the land will be a taxable supply unless it is GST-free or input taxed.

GST-free supplies of land

In accordance with section 38-445 of the GST Act, a supply of a freehold interest in land by the Commonwealth, a State or a Territory is GST-free where certain requirements are satisfied. The land must be unimproved land, and the supply must either be of a freehold interest in the unimproved land, or a supply by way of long-term lease. 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.

You are 'the Commonwealth, a State or a Territory' for the purposes of section 38-445

Goods and services tax ruling GSTR 2006/5 discusses the meaning of 'Commonwealth, a State or a Territory.' Our previous decision was based on the view that local governments are not a State or a Territory, and therefore your sale of Lot 2 could not be GST-free under section 38-445 of the GST Act.

Since our previous decision issued the ATO has reviewed its administrative position regarding GSTR 2006/5 and local government entities.

From an administrative perspective, and for compliance purposes, the ATO now accepts that local government bodies established under certain local government legislation are the 'State' for the purposes of applying the GST provisions referred to in paragraph 1 of GSTR 2006/5 (including section 38-445 of the GST Act).

You are a local government body established under and regulated by a relevant Act. This is one of the Acts to which our administrative approach applies, and therefore we accept that you are the 'State' for the purposes of section 38-445 of the GST Act.

Our revised view applies retrospectively, and therefore we consider that at the time of your supply of the land you were the State and were entitled to apply section 38-445 of the GST Act.

The land was 'land on which there are no improvements'

For section 38-445 of the GST Act to apply to make the supply of land GST-free, the land supplied must be 'land on which there are no improvements' (unimproved land) at the time of the supply.

The ATO view on improvements on land in respect of section 38-445 is explained in Goods and services tax ruling GSTR 2006/6. This explains that unimproved land is taken to be land in its natural state, so to establish whether there are improvements on the land the land is compared with land in its natural state (paragraph 20 GSTR 2006/6).

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 the land.

At the time of the supply Lot 2 was a landscape conservation area, with a non-engineered stone retaining wall of up to four metres, dating from the Federation period, and three mature trees. It includes a grassed area at one end. The site also contained an easement for the maintenance and replacement of overhead electricity cables.

Walls are an example of a human intervention that may enhance the value of land. However, GSTR 2006/6 considers that some interventions that were once improvements but that have deteriorated over time (or for example may not have ever been structurally sound according to modern standards) may not enhance the value of the land. To be an improvement, the human intervention must enhance the value of the land.

Most importantly though, paragraph 36 of GSTR 2006/6 advises as follows:

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 advised that you received a valuation of the land that found that 'there were no improvements to or on the land'.

Based on this valuation, and the guidance provided by GSTR 2006/6, we accept that in these circumstances the human interventions on the land were not improvements on the land at the time the supply was made for the purposes of section 38-445 of the GST Act.

We also note, for the avoidance of any doubt, that the land vested in you before 1900. The subdivision of the lots that you undertook was not a supply. Therefore no previous supply of the lot has been made by you since 1 July 2000.

Conclusion

We therefore accept (for the purposes of section 38-445 of the GST Act) that you are the State, that the land you have supplied is land on which there are no improvements, that you supplied the land by way of a freehold interest in the land and that the land had not already been the subject of supply that is GST-free under section 38-445.

It follows that your supply of Lot 2 was therefore a GST-free supply under section 38-445 of the GST Act.

The Commissioner confirms that this advice prevails over the previous ruling issued regarding the transaction. This ruling replaces the previous advice, and the previous advice is withdrawn due to its inconsistency with the current ATO view on the meaning of the State.

We will issue a formal withdrawal notice for the first ruling that confirms this.

Question 2

Summary

The Commissioner accepts that you have overpaid GST and are entitled to a refund of the overpaid amount.

Detailed reasoning

As you have made a GST-free supply, but have remitted GST in connection with this supply, you have therefore remitted an amount in excess of what was legally payable on the supply. That is, you have overpaid an amount of GST.

Before any refund of the overpaid amount can be claimed, the impact of section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (section 105-65) must be considered. Section 105-65 places a restriction on refunds that arise from the overpayment of GST in certain circumstances.

Section 105-65 applies and the Commissioner need not give you a refund if you overpaid an amount because a supply was treated as a taxable supply when the supply was not a taxable supply and one of the following applies: either the recipients have not been reimbursed an amount corresponding to the overpaid GST, or the recipient of the supply was registered or required to be registered.

According to your statements, at the time of the supply you did not believe the supply to be taxable. It was only afterwards that you considered this possibility and sought advice.

However, you have since treated the supplies as taxable as you have remitted an amount as GST to the Commissioner on that supply in the calculation of your net amount. As you have not reimbursed a GST amount to the unregistered purchaser, section 105-65 applies such that the Commissioner need not give you a refund of the overpaid GST amount.

Exercise of the discretion available under section 105-65

Section 105-65 applies such that the Commissioner need not give a refund of the overpaid amount, but has discretion to do so in appropriate circumstances. This discretion is explained, and guidance as to its use is given, in Miscellaneous Taxation Ruling MT 2010/1.

In deciding whether to exercise the discretion the Commissioner must consider each case based on all the relevant facts and circumstances.

The Commissioner must also have regard to the subject matter, scope and purpose of section 105-65. In particular, section 105-65 is designed to prevent windfall gains to suppliers and is based on the presumption of the GST system that the cost of the GST is ultimately borne by unregistered end consumers.

You have advised that you initially considered that you did not have a GST liability on the sale. The contract was silent as to the GST treatment (no boxes were ticked). We accept your contentions that you did not believe GST was payable at the time and did not include GST, as we consider that with a substantial transaction such as a land sale it is reasonable to conclude that if you were of the opinion that the supply was subject to GST this would have been made clear at the time. This is particularly so as the contract specifies that normally no additional amount is to be added to the price for GST.

In further support of your claim that no GST was included or passed on is the fact that no information was given (by way of a tax invoice, documentation etc) to recipient to suggest that the supply may have been subject to GST. We accept that in these particular circumstances the purchaser would not be under the impression that they have paid an amount in respect of GST.

It was only after settlement, when your Taxation Manager reviewed the transaction, that you became aware of the possibility that you may have a liability for GST. You then remitted GST out of caution to avoid any penalties for late payment prior to seeking a private ruling to clarify the correct GST treatment.

We consider that the following is relevant in your circumstances:

· You have mistakenly treated the supply as taxable, when it is GST-free under subsection 38-445 of the GST Act.

· The price was GST exclusive as you believed at the contact date that the supply was GST-free, and you have not recovered from the purchaser the GST amount that you paid on the supply.

The amount the purchaser paid for your supply therefore did not include GST. The purchaser did not pay GST as there was no GST included in the price of the supply. The error was made at the reporting stage when you treated the supply as taxable rather than GST-free.

The Commissioner is satisfied that you have borne the cost of GST and that you have not passed on the cost of the GST to the recipients. The Commissioner will therefore exercise his discretion to refund the overpaid GST.

We consider that your request for a refund is within the four year time limit on refunds from the Commissioner under section 105-55 of Schedule 1 to the Taxation Administration Act 1953.

The requested amendments to your Business Activity Statement may be made in accordance with your instructions.

We note that we do not verify or confirm the amount of the refund, only the entitlement to the refund.