Edited version of your private ruling

Authorisation Number: 1012443190534

Ruling

Subject: GST and the Margin Scheme

Question 1

Does the Commissioner agree that you are entitled to calculate your notional goods and services tax (GST) liability in respect of sales of residential lots at a particular site, using item 4 of the table in section 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (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 previously obtained a private ruling from the ATO.

Since that ruling you have reviewed your files and have identified several substantial pieces of information relevant to the state of the site as at 1 July 2000 not previously provided to the Commissioner. You believe that this information materially impacts the facts and circumstances set out in your previous GST private ruling request which the Commissioner ruled upon.

You are a government entity registered for GST. You hold the freehold interest in certain parcels of land (the "relevant land") and have held this interest since before 1 July 2000. You acquired the relevant land many decades ago. The relevant land is no longer required and you have decided to sell the surplus relevant land for residential use.

Land relating to the community and commercial area is excluded from this application for a private GST ruling. Consequently this ruling covers sales and potential sales of all residential lots, including the subsequent subdivision and development of the undeveloped englobo land ("the Relevant Lots"), which you consider was land on which there were no improvements as at 1 July 2000.

Residential lots commenced being sold in 20XX and continue to be sold on an ongoing basis. Residential lots have been sold in relation to various Stages of development. You are currently applying the margin scheme to sales of residential lots using item 1 of the table in section 75-10(3) of the GST Act.

Facts provided:

The land was either cleared for farming purposes by early settlers prior to you acquiring the land or has remained as bushland. You are aware of the following human interventions which may enhance the value of land:

· fencing - internal or boundary fencing;

· clearing of timber, scrub or other vegetation;

· removal of rocks, stones or soil;

· sown pastures; and

· removal of pest animals, rabbit burrows etc.

You are not aware of any other interventions undertaken by humans on the land.

Some boundary fencing as at 1 July 2000 was merely for the purposes of acting as a security barrier to prevent unauthorised access to the adjoining operational land. This fencing must be removed/relocated with the change in ownership.

You have undertaken clearing both prior and subsequent to 1 July 2000 for the purposes of creating fire breaks and general fire prevention in order to maintain the land in its current form. This is required by the local authorities for the purposes of reducing the risk of fire.

Rocks and stones may also have been removed from the relevant land at some point in time. You assume that it may have occurred when the land was first occupied by settlers.

As at 1 July 2000, certain parcels of land contained sown pastures as this was the historical use of the land prior to your ownership. You have continued to sow the land to maintain the existing conditions of the land and as part of the weed control management strategies for the relevant land.

Pest and animal abatement programs would have most likely been undertaken as part of your general land management practices to comply with government and local council policies.

Further facts and information provided:

a. Extracts;

b. A historical title search of the property;

c. Aerial photographs of the site at various dates;

d. Extracts from the Environmental Audit Reports;

e. A map of the remediation zones;

f. Extracts from the draft Remedial Action Plan;

g. A GST valuation report;

h. A more recent aerial photograph of the site;

i. An extract from a booklet; and

j. A map of the area demonstrating the extent of contamination from historical uses.

In light of this additional information, you have also:

a. Obtained a professional valuer's assessment in relation to whether in the valuer's professional judgement, there were no improvements on the site as at 1 July 2000 (the Professional Valuer's Assessment); and

b. provided further legal analysis on what constitutes an improvement.

Historic ownership

As at 1 July 2000, the site was located on Y titles, which were acquired many years ago.

Historical use of land pre 1 July 2000

· livestock grazing;

· other uses since

Land status as at 1 July 2000

As at 1 July 2000, you have advised that the site suffered from significant degradation as a consequence of its historical use. In particular, the land as at 1 July 2000 contained the following characteristics:

a. Dilapidated structures not fit for human habitation;

b. Substantially contaminated soil;

c. Limited cropping/grazing (which itself caused further degradation to the soil of the site);

d. Dilapidated temporary fencing;

e. Firebreaks; and

f. Limited pest control.

Each of these characteristics is described further below.

Structures

As at 1 July 2000, the following structures existed on the land:

These are not fit for human habitation

Soil contamination

Due to past activities carried out on the land, significant soil contamination existed throughout the site as at 1 July 2000. You have provided a table summarising the contamination existing at the site as a result of its prior use.

For further detail, you have provided extracts of the environmental audit reports which confirms the nature and extent of the contamination of the land as at 1 July 2000. The extent of the further contamination is also demonstrated.

Other aspects of the site at 1 July 2000

Stubble and Weed Management. Sown Pastures.

Grazing on the land was undertaken for the purposes of stubble and weed management, through the fertilisation of the land. The resultant pastures were a mix of annual grasses and legumes. In addition there was also limited periodic cropping for grain or fodder production. No cropping or farming activities were undertaken for commercial purposes.

Fencing

The boundary fences existing on the land are situated on the outer perimeter of the site and existed merely for the purposes of acting as a security barrier to prevent unauthorised access to the land. This fencing must be removed/relocated with the change in ownership.

Clearing

Measures, including clearing timber, scrub and other vegetation, were undertaken for the purpose of creating fire breaks, solely to allow access to fire equipment and reduce the spread of a fire. The land was relatively flat. The land was vegetated by open grassy woodlands, rubbish and noxious weeds that substantially degraded the land.

Pest abatement

You have undertaken a pest abatement program as part of your general land management practices for the purpose of maintaining the existing condition of the land. You believe that the use of the pesticides as part of this basic land management activity also seems to have contributed to the substantial soil contamination.

Sewerage

The sewerage pipeline is buried below the natural surface and is subject to an easement which has been in place since you acquired the site. The pipeline was put in place to service the existing housing estate.

General

You seek this ruling on the premise that item 4 applies to sales of residential allotments at the site.

You state that this approach is consistent with the Commissioner's view as set out in 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), which at paragraph 50 states:

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.

You believe that the additional information, particularly the environmental reports provided in this submission, materially impacts the Commissioner's previous conclusions and supports the position that any farming or pest control activities caused significant deterioration to the land. For this reason you consider that the additional information indicates that the Relevant Lots were unimproved as at 1 July 2000 and that item 4 of the table in subsection 75-10(3) and section 75-10(3A) of the GST Act apply to the sale of the residential allotments.

You submit that you have acted upon the Commissioner's recommended approach for determining whether "there were no improvements" on the land as at 1 July 2000 for the purposes of item 4 in the table in s 75-10(3) of the GST Act and engaged a professional valuer to give his professional assessment. You also submit that based on the Commissioner's comments at paragraphs 35 and 36 of GSTR 2006/6, the professional valuer's assessment should be conclusive of this point.

For the Commissioner's further comfort, you have provided some further detail of the various legal authorities relating to the issue of the unimproved nature of the Relevant Lots and accordingly you conclude:

§ that there were no improvements on the land as at 1 July 2000 as required under item 4 of the table in s 75-10(3) of the GST Act

§ that you should be able to calculate your notional GST liability in accordance with s 75-10(3A) of the GST Act.

You also request that the Commissioner review the above, withdraw the previous GST private ruling and issue a new GST private ruling which confirms that he is satisfied as to the application of item 4.

Further additional information provided

You provided further addition information in relation to:

a) The legal requirements for remediating the site

b) The extent of land contamination

c) An overlay of the title areas of the land with the audit areas of the land

d) Confirmation that appropriate documentation exists in order to apply the margin scheme.

Additional Professional Valuer's Assessment

You sought an additional professional valuer's assessment as to whether there were no improvements on the land for the purposes of the GST Act, in accordance with GSTR 2006/6 and in accordance with our specific questions regarding drainage, sewerage and gas easements.

The valuer has assessed the land as having no improvements as at 1 July 2000 in his report.

Relevant legislative provisions

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

Subsection 75-10(3)

Subsection 75-10(3A)

Reasons for decision

Summary

Based on the information provided we accept that the land is land upon which there are no improvements as at 1 July 2000 for the purposes Item 4 of the table in subsection 75-10(3) of the GST Act.

You are entitled to calculate your notional GST liability using item 4 of the table in section 75-10(3) and section 75-10(3A) of the GST Act.

Detailed reasoning

Item 4 of the table in subsection 75-10(3) of the GST Act (Item 4) provides that valuations may be used to work out margins for the purposes of the Margin Scheme if the supplier is the Commonwealth, a State or a Territory and has held the interest, unit or lease since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000. Where this is the case the valuations are to be made on the day on which the taxable supply takes place.

The Commissioner has provided clarification on the meaning of the phrase "land on which there are no improvements" in GSTR 2006/6.

The ruling follows the principle established by High Court in Morrison v. Federal Commissioner of Land Tax (1914) 17 CLR 498 and states at paragraph 22:

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.

Whether a human intervention enhances the value of the land is an objective test which cannot be determined by reference to use or intended use by either the supplier or the recipient. The issue of whether there are improvements on the land is also a question of fact. 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.

Paragraph 25 of the ruling provides a list of examples of human intervention which may enhance the value of land that includes:

· 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

· clearing of timber, scrub or other vegetation

· excavation, grading or levelling of land

· drainage of land

· removal of rocks, stones or soil

· filling of 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 at the relevant date. If any of the human interventions located on the land enhance its value at the relevant date, then there are improvements on the land. Whether the net value of the human interventions enhances the overall value of the land is irrelevant.

From the evidence submitted, there have been a number of human interventions on the land over a considerable period of time, such as:

· sheds and other out-buildings

· industrial premises

· 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

· removal of rocks, stones or soil

· filling of land.

Ordinarily, these are considered human interventions that may enhance the value of the land. However due regard must be given as to whether any or all of these improvements are, or were, still in existence as at 1 July 2000 and their condition.

From the documentation submitted it can be seen that the site suffered from significant degradation as a consequence of its historical use. In particular, the land as at 1 July 2000 contained the following characteristics:

a. Dilapidated structures not fit for human habitation;

b. Substantially contaminated soil;

c. Limited cropping/grazing (which itself caused further degradation to the soil of the site);

d. Dilapidated temporary fencing;

e. Firebreaks; and

f. Limited pest control.

A prescribed a mandatory condition was that a certificate of environmental audit must be issued for the land in accordance with various parts and sections of the Environmental Protection Act 1970 in order to satisfy the land as ready for use for residential purposes. This condition necessitated site remediation by land remediation experts therefore site assessments were undertaken and remedial action plans drawn.

Extracts of the site assessments show that some areas were suitable for use as at the date of the site assessments. These assessments indicate some improvement on some of the land.

Professional Valuer's Assessments

Paragraphs 35 and 36 of GSTR 2006/6 advise that a professional valuer may be engaged to establish whether there are improvements on the land.

We refer to your professional valuer's assessment as to whether there were improvements on the land. This assessment was based predominantly on definitions pursuant to The Valuation of Land Act 1960, (Land Act) visual inspection and the environmental and remedial reports.

In assessing the status of the subject property, the valuer referred to definitions of "improvements" pursuant to the Land Act which says that improvements do not include the following (as reproduced from the relevant section of the Land Act):

"(a) work done or material used for the benefit of the land by the Crown or by any statutory public body; or

(b) improvements comprising-

(i) the removal or destruction of vegetation or the removal of timber, rocks, stone or earth; or

(ii) the draining or filling of the land or any retaining walls or other works appurtenant to the draining or filling; or

(iii) the arresting or elimination of erosion or the changing or improving of any waterway on or through the land - unless those improvements can be shown by the owner or occupier of the land to have been made by that person or at that person's expense within the fifteen years before the valuation".

The above does not use the same factors as expressed in GSTR 2006/6 in relation to improvements on the land. To remedy potential inconsistencies or uncertainty you sought a second valuer's opinion based on the criteria in GSTR 2006/6.

This new assessment specifically focuses on certain criteria expressed in GSTR 2006/6 as well as the status of easements on or over the land. The valuer found that the above human interventions that were once improvements no longer enhance the value of the land. The improvements, over the whole of the land, have been either exhausted or extinguished. In addition, some of the human interventions and activities have been assessed as further degrading the land such that there are no longer any improvements on the land as at 1 July 2000.

With respect to easements on the property, the valuer found that:

· the sewerage pipeline easement does not benefit the site.

· An electricity easement benefits land outside the subject property.

· The gas easement cannot be used development and is an impediment, not a benefit.

· As such the Land is land on which there are no improvements.

Conclusion

The Commissioner accepts that the residential lots are land upon which there were no improvements as at 1 July 2000 for the purposes Item 4 of the table in subsection 75-10(3) of the GST Act.

You are entitled to calculate your notional GST liability in respect of sales of residential lots, using item 4 of the table in section 75-10(3) and section 75-10(3A) of the GST Act.