Edited version of your private ruling

Authorisation Number: 1012473517861

Ruling

Subject: The margin scheme and improvements on the land.

Question

Does Item 4 of the table in section 75-10(3) apply in calculating the margin in respect your land sales?

Answer

Yes

Relevant facts and circumstances

Each of you is a Local Government established under your State's Local Government Act (LGA).

You hold freehold title to the Land collectively as tenants in common in unequal shares.

The Land was initially acquired by a minority of you. Interests in the land were transferred to the rest of you by force of statute. No consideration was paid in respect of the transfers.

You established a joint venture (Entity C) to deal with the Land. The joint venture (JV) is registered for GST, but not as a GST joint venture.

Each of you has executed a Power of Attorney (PoA) agreement, appointing Entity C as your attorney to rezone, subdivide, develop and sell the Land on their behalf. The terms of the PoA agreements are identical. All have been lodged with relevant titles authority.

The JV was established to:

(a) to undertake, in accordance with the objectives, the rezoning, subdivision, development, marketing and sale of the Land; and

(b) to carry out and do all other acts and things which are reasonably necessary for the bringing into effect of the matters referred to in paragraph (a) of this clause.

The objectives stated in the JV agreement include:

· to develop and improve the value of the land

· to maximise, within prudent risk parameters, the financial return to the Participants.

Under the JV agreement, the interests which the participant Local Councils hold individually in the land may be transferred to Entity C. Alternatively, Entity C may arrange for that part of the Land to be transferred directly from the Participants to a third party. Freehold title to the Land remains with the applicant Local Councils.

To ease the administrative burden on Entity C, you entered into section 153-B arrangements in respect of costs incurred by Entity C only. The 153-B arrangements do not extend to supplies made by you through Entity C as your agent. The GST collected on end sales is passed by Entity C directly to you for payment to the ATO via inclusion in your respective Business Activity Statements.

The Land is essentially virgin bushland. You are not aware of any clearing of the land or other improvements prior to its acquisition by the minority. There have been no improvements since that acquisition. Accordingly, you assert that there were no improvements on the Land at 1 July 2000. You supplied aerial photographs of the land, taken around 1 July 2000, which support this assessment.

Since 1 July 2000, Entity C has received further valuation reports, which stated that the Land contained no buildings or merged improvement.

More recently Entity C (as your agent) has subdivided some of the Land and sold the lots to the public. In all cases, a written agreement has been entered into with the lot buyer agreeing that the margin scheme will be applied to the sale. Entity C will obtain identical agreements for margin scheme use from all future lot buyers.

You provided a sample sale agreement which states that the land is being sold by Entity C on your behalf under the Power of Attorney arrangement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9

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

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997

Reasons for decision

In this ruling,

· unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

· all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au

Supplier

The GST law and the margin scheme rules are contingent upon the identification of the supplier. Accordingly, it is necessary to consider who is supplying the subdivided lots to the final purchaser.

Pursuant to the JV agreement, Entity C's purpose is to undertake the rezoning, subdivision, development, marketing and sale of the Land for the benefit of the communities of the applicant Local Councils.

Under the JV agreement, the interests which the applicant Local Councils hold individually in the land may be transferred to Entity C. Alternatively, Entity C may arrange for that part of the Land to be transferred directly from the Participants to a third party. Freehold title to the Land remains with the applicant Local Councils.

The sample sale agreement states that the land is being sold by Entity C on behalf of the applicant Local Councils under the Power of Attorney arrangement.

These facts indicate that Entity C is acting on behalf of the applicant Local Councils in making sales of the individual lots to the final purchasers, and is not acquiring or disposing of the lots in its own right.

Having determined that the applicant Local Councils, not Entity C, are making the supplies of the subdivided lots, it is necessary to consider whether they are making lot sales collectively, or whether each of them makes a disposal of its own respective interest.

The JV agreement constitutes an arrangement to enable the individual applicant Local Councils to achieve the rezoning, subdivision, development, marketing and sale of the Land.

Paragraph 11 of Goods and Services Tax Ruling 2004/2: What is a joint venture for GST purposes? explains that a joint venture is an arrangement between 2 or more parties, characterised by the following features:

· sharing of product or output, rather than sale proceeds or profits;

Entity C's objective is to undertake the rezoning, subdivision, development, marketing and sale of the Land. Entity C, as agent for the applicant Local Council, supplies their individual entitlements to the lots and distributes the sales proceeds to each of the applicant Local Councils in accordance with its respective ownership share of the Land.

· a contractual agreement between the participants;

The JV agreement sets out the administrative mechanism to facilitate the objectives of Entity C.

· joint control;

Each of the applicant Local Councils appoints members to Entity C.

· a specific economic project;

The specific economic project in this case is rezoning, subdivision, development, marketing and sale of the Land.

· cost sharing

The applicant Local Councils are required to contribute funds in accordance their respective ownership shares in the land

Whilst the agreement has some clauses that may indicate the formation of a partnership, the applicant Local Councils have not sought to form a partnership. We consider that the agreement is more reflective of a joint venture arrangement.

However, the applicant Local Councils have not formed a GST joint venture. Therefore, each Council is required to report its own acquisitions and supplies.

Under section 9-5, you make a taxable supply when:

· 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.

On the facts provided, your supplies of the individual lots will satisfy the requirements of section 9-5. Further, in your circumstances, the supplies will not be GST-free or input taxed. Therefore, your supplies of the lots to third parties will be taxable supplies.

Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by:

a. Selling a freehold interest in land; or

b. Selling a stratum unit; or

c. Granting or selling a long-term lease;

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

You have advised that there is, or will be, a written agreement with the purchaser of each lot that the margin scheme will be applied, in respect of sales to date and all future sales.

However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long term lease through a supply that was ineligible for the margin scheme.

On the facts provided, the lot sales will not be ineligible for the margin scheme. Therefore, the GST on any sale will be calculated as 1/11th of the relevant margin, i.e. 1/11th of the amount by which the consideration for the supply exceeds the valuation of the interest, unit or lease.

If Item 4 of the table in section 75-10(3) applies in calculating the margin in respect of the Land lots, the days when the valuations are to be made will be the days on which the taxable supplies of the individual lots occur.

For item 4 of the table in s75-10(3) to apply, the following requirements must be met:

· the supplier (each of the applicant Local Councils) must be considered as "a State" for GST purposes.

· the land must have been held by the supplier since before 1 July 2000.

· there must have been no improvements on the land as at 1 July 2000.

The supplier must be considered as "a State" for GST purposes.

Each of you is a Local Government established under your State's Local Government Act (LGA).

The ATO accepts that local government bodies established under that Local Government Act are the 'State' or 'Territory' for the purposes of applying the GST provisions referred to in paragraph 1 of Goods and Services Tax Ruling 2006/5: meaning of 'Commonwealth, a State or a Territory (GSTR 2006/5).

The land must have been held by the supplier (each Applicant) since before 1 July 2000.

The Land was initially acquired by a minority of you. Interests in the land were transferred to the rest of you by force of statute. No consideration was paid in respect of the transfers.

Paragraphs 3 to 5 of Goods and Services Tax Determination 2006/4 (GSTD 2006/4) explain that in some circumstances, real property that was acquired by one government department or agency is vested in another government department or agency. This may occur as part of a transfer of departmental responsibilities.

For the purposes of Item 4 (of the table in s75-10(3)) the words 'Commonwealth', 'a State' or 'a Territory' are not limited to a specific government entity, but encompass all the departments and agencies that fall within the ambit of the term.

This means that where real property is held before 1 July 2000 by a government department or agency and on or after 1 July 2000 that property is vested in another department or agency that is part of the Commonwealth or the same State or Territory, the real property has been held by the 'Commonwealth, a State or a Territory' for the entire period.

Therefore, the acquiring entities have effectively held each of their interest since before 1 July 2000.

There must have been no improvements on the land as at 1 July 2000.

Paragraph 22 of Goods and Services Tax Ruling 2006/6: improvements on the land for the purposes of Subdivision 38-N and Division 75 explains 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.

The Land is essentially virgin bushland. You are not aware of any clearing of the land or other improvements prior to its acquisition by the minority. There have been no improvements since that acquisition. Accordingly, you assert that there were no improvements on the Land at 1 July 2000. You supplied aerial photographs of the land, taken around 1 July 2000, which support this assessment.

Since 1 July 2000, Entity C has received further valuation reports, which stated that the Land contained no buildings or merged improvement.

On the facts supplied, it is reasonable to conclude that, if the land was ever improved, any such improvements were no longer reflected in the value of the land as at 1 July 2000. On this basis, we concur with your assertion that the land was unimproved as at 1 July 2000.

Therefore, you have satisfied the basic provisions for calculating the margin in accordance with item 4 in the table to subsection 75-10(3). However, these basic provisions can be overridden by section 75-11, which specifies how the margin should be calculated in particular circumstances. In your situation, the only relevant subsections of section 75-11 for consideration are subsections (7) and (8).

Subsection 75-11(7) applies to a taxable supply made under the margin scheme where:

· you acquired the interest, unit or lease in question from an entity who was your associate at the time of the acquisition; and

· none of the other subsections (in subsection 75-11) apply.

If none of the other subsections of 75-11 apply, subsection 75-11(7) will apply if, at the time each respective applicant Local Council acquired the land, it was acquired from an entity that was an associate at the time of acquisition.

In considering whether subsection 75-11(7) applies, given that each applicant Local Council is a local government, it is necessary to consider whether local governments are associates for GST purposes.

Paragraph 75-11(8) (c) provides that subsection 75-11 (7) applies to an acquisition through a supply made by a "government entity" of the kind referred to in sections 72-95 and 72-100. This section effectively operates to make a "government entity" (as defined) an associate of another government entity for the purposes of applying subsection 75-11(7). Therefore, if local governments are government entities they will be associates of one another per subsection 75-11(8).

Section 72-100 provides that 'government entity' has the meaning given in section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). A local government does not fall within (a), (b), (c) or (d) of that section. An entity is defined at section 184-1 and includes a body corporate. In paragraph 32 of Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, the Commissioner considers that a local council established under a Local Government Act is a body corporate. Accordingly, a local council does not fall within paragraph (e) because it is accepted to be an entity and cannot be considered not to be an entity as required by paragraph (e).

Therefore, subsection 75-11(8) does not operate to make local government associates of one another for the purposes of subsection 75-11(7).

However, subsection 75-11(8) simply determines that subsection 75-11(7) applies to associates of a type referred in subsection 75-11(8) and does not preclude any entities which do not fall within subsection 75-11(8) from being associates. Therefore, even though local governments fall outside subsection 75-11(8), they would still be required to apply subsection 75-11(7) if they were associates under section 318 of the Income Tax Assessment Act 1936 (ITAA36).

A local government is a body corporate and therefore falls within the definition of a company per section 995-1 of Income Tax Assessment Act 1997. Section 318 of ITAA 36 defines when companies are associates.

Under section 318 of ITAA 36, 2 companies (i.e. 2 local governments) are associates where one entity sufficiently influences the other, has a majority voting interest in the other, or both entities are sufficiently influenced or majority controlled by a third entity. A company is sufficiently influenced by another if the company, or its directors, are accustomed or under an obligation (formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the person or entity (however those directions, instructions or wishes are communicated).

Prima facie it could be conceivable that local councils are sufficiently influenced by State Government because the State has very specific powers to intervene in local government affairs. In ATO Interpretative Decision 2005/337: GST and a local government as an associate of State Government departments, it is the ATO's view that the State does not sufficiently influence a Local Council. Therefore, a Local Government is not an associate of departments of the State for the purposes of Division 72.

It follows that, in view of their independence of activities and operation in different municipalities, Local Councils are not associates of one another.

Accordingly, subsection 75-11(7) is not applicable to the portions of the Land acquired by force of statute by the relevant applicant Local Councils from other applicant Local Councils.

Therefore, you have met the requirements for item 4 of the table in section 75-10(3) to apply, namely:

· the supplier (each applicant Local Council) is "a State" for GST purposes.

· the land has been held by the supplier (applicant Local Council) since before 1 July 2000.

· there have been no improvements on the land as at 1 July 2000.

· section 75-11 does not apply in your particular circumstances.

Accordingly, you are entitled to apply Item 4 of the table in subsection 75-10(3) when calculating the margin in respect of the supply lots sold from the Land.