Edited version of your private ruling

Authorisation Number: 1012523600037

Ruling

Subject: GST and unimproved land

Question 1

Will the supply of the Land be a supply of a freehold interest in land on which there are no improvements for the purposes of Subdivision 38-N, and in particular section 38-445, of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The Land is considered to be a supply of a freehold interest in land on which there are improvements.

Relevant facts and circumstances

You are registered for Goods and Services Tax (GST).

The land that is the subject of this ruling is located at A. The land is identified as B (hereafter referred to as 'Land').

Historically, this Land was C. The Land was completed in the 1960s.

The Land has been used for D. At various times, there has been human intervention on the Land, however, no permanent structures have been constructed on the Land.

Current identifiable features of the Land are:

· E

· Temporary power and water connection;

· F

· Mesh and pole boundary fencing.

As at 1 July 2000, the Land was held by X.

On a date, the Land was transferred to Y.

On a date Y was replaced by Z. All assets of Y became your assets as at this date. Accordingly the Land is now owned by you.

You provided aerial and street view photographs of the Land (Appendix B)

You provided a valuation report (Appendix C)

The Land is subject to an Option Agreement whereby W has a right to purchase the Land and you have a right to sell the Land at a future date to be agreed between the parties: Sale dates are envisaged as follows:

o Date 1

o Date 2

Pursuant to V, you represent U.

Relevant legislative provisions

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

Subsection 38-445(1)

A New Tax System (Australian Business Number) Act 1999:

Section 41

Reasons for decision

In order to satisfy the requirements of Subdivision 38-N, the following requirements must be satisfied:

(1) The supplier is T.

(2) The supply is of a freehold interest in land.

(3) The Land is land on which there are no improvements.

(4) The Land has not been subject to a supply that was subject to subdivision 38-N.

We agree that:

· the supplier is T

· the supply is of a freehold interest in land, and

· the Land has not been subject to a supply that was subject to subdivision 38-N

However, we do not agree that the Land is land on which there are no improvements.

Land and improvements

The meaning of "land" is not defined for the purposes of the GST Act, therefore it takes its generally accepted meaning, ie '1. the solid substance of the earth's surface. 2. the exposed part of the earth's surface' (Macquarie Dictionary). You have cited the Oxford English Dictionary definition of land as "…the solid portion of the earth's surface, as opposed to sea, water…". We consider that any solid portion of the earth's surface can be regarded as "land", even though it may be covered by the sea itself, or the water in a river.

The High Court, in Goldsworthy Mining Ltd v Federal Commissioner of Taxation [1973] HCA 7; (1973) 128 CLR 199, at paragraph 32 (Goldsworthy case), has accepted that land below the surface of sea-water is also considered to be land within its generally accepted meaning:

32. There is the independent question whether the subject matter of the dredging lease is "land" within the meaning of s. 88 (2) of the Income Tax Assessment Act, but for present purposes that question may be put to one side. There is no reason for thinking that, at common law, a lease cannot be granted of portion of the sea-bed, provided that the property the subject of the grant is defined with sufficient certainty. There may be some question whether the sea-bed answers the description of "land" in every sense in which that word is used. But in general the word in its legal signification includes any ground, soil or earth (Halsbury's Laws of England, 3rd ed., vol. 32, p. 249). There is a long history of leases for mining purposes of strata of land underlying the sea, which supports the view that a lease may be granted of portion of the sea-bed. The description contained in the schedule to the dredging lease makes it clear that the property the subject of the instrument consists of the surface of the sea-bed as it exists at the time of the grant to a specified depth forty-five feet below Admiralty datum. The exception specified in the schedule then excludes so much of the sea-bed as is excavated in accordance with the dredging carried out by the appellant. By reason of this exception the vertical ceiling of the property demised is reduced and assumes the actual surface of the sea-bed as it exists from time to time so long as it does not extend beyond the surface as it existed at the time of grant. Consequently, the property the subject of the dredging lease does not include the superjacent waters, but is confined to the surface of the sea-bed, extending to the depth specified in the schedule. It follows, therefore, that in my opinion the property which was the subject of the instrument is land within the general acceptation of that expression, notwithstanding that it has the character of sea-bed.

The High Court, in the case of Risk v Northern Territory [2002] HCA 23 (Risk case), decided on the issue of whether "land in the Northern Territory" includes the seabed of bays or gulfs for the purposes of the Land Rights Act. We cannot conclude that the High Court in the Risk case provides a general principle that land is only what is above the low water mark or that land only comes into existence once it is raised above the low water mark. We conclude that he High Court in the Risk case supports the principle that land can encompass the seabed as was as indicated in the High Court's citation of the Goldsworthy case (paragraph 42):

42. In its ordinary meaning, "land" means the "solid portion of the earth's surface, as opposed to sea, water"[39]. In certain statutory contexts, however, "land" is capable of referring to the sea-bed. In Goldsworthy Mining Ltd v Federal Commissioner of Taxation [40], Mason J held that, for the purpose of s 88 of the Income Tax Assessment Act 1936 (Cth), a lease for dredging purposes of the sea-bed was a lease of land. Hence, whether or not land in the Land Rights Act includes the sea-bed depends on the history, context and purpose of the Land Rights Act[41]..

And again at paragraph 81:

81. In Dampier Mining Co Ltd v Federal Commissioner of Taxation[ 88], in the course of construing provisions of the Income Tax Assessment Act 1936 (Cth) ("the Tax Act"), Mason and Wilson JJ said that it was "somewhat artificial" to speak of the seabed as being "land". However, they went on to refer to the judgment of Mason J in an earlier case construing the Tax Act, Goldsworthy Mining Ltd v Federal Commissioner of Taxation [89]. There, his Honour had referred to the long history of leases for mining purposes of strata of land underlying the sea, but also had observed that there may be some question as to whether the seabed answers the description of "land" in every sense in which that word is used.

The Risk case appears to support the notion that land can include land under the sea or fresh water. Therefore, in your case, we conclude that land which lied under the surface of the river is also 'land' within its generally accepted meaning, and wider statutory meaning.

The Commissioner has provided clarification on the meaning of the phrase "land on which there are no improvements" in GSTR 2006/6. It is important to consider the view outlined in GSTR2006/6 in its entirety in order to determine the Commissioner's view on what constitutes improvements on the land. Professional valuations at times do not consider the ruling in its entirety and therefore form conclusions not necessarily aligned with the Commissioner's view. The premise is outlined at paragraph 20 which 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 Land in question originated from below the surface of the river and it is at this point, being in its natural state, from which we consider whether there have been any improvements that enhance its value. Paragraph 38 of GSTR 2006/6 outlines this view:

38. Support for this view is found in the decision in Commonwealth of Australia of Australia v. Oldfield (1976) 133 CLR 612; (1976) 10 ALR 243 where the High Court described the meaning of 'improvements on the land' in the following manner:

We are concerned with the value at the relevant date of the physical consequences which enure to the land of the acts whereby the land attained a quality and usefulness additional to that which it had in its virgin state.

...

GSTR 2006/6 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.

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. Whether the net value of the human interventions enhances the overall value of the land is irrelevant.

The ruling states that objectivity is required when establishing the condition of the land. Paragraph 24 states:

24. Determining whether a human intervention enhances the value of the land entails an objective test. This means that whether an intervention enhances the value should not be determined by reference to use or intended use by either the supplier or the recipient.

We consider that an objective view of whether any of the human interventions would be of value to anyone whomever for any purpose whatsoever is necessary in order to correctly establish whether there are any improvements on the land. In other words, for whoever purchased that land any particular intervention would relieve them of the cost of doing that themselves. The intended or subjective use of a particular person, including the notion of "highest and best use" is irrelevant.

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.

You have engaged a professional valuer to establish whether there are improvements on the land and this valuer has provided you a valuation report (copy submitted - Appendix C).

Professional Valuer's Report

The professional valuer's report contains the opinion that the subject property is unimproved as at the relevant date. Site inspection occurred on a date.

In relation to the human interventions which are relevant to the Land, the professional valuer's report contains the following findings and comments:

· H was provided, however, as at our inspection date was dilapidated and not suitable for any purpose.

· …the subject land remains in its original reclaimed state.

· …the J…K…are not considered as improvements to the land given that they are not permanent fixtures.

· I consider that the human intervention is not an improvement as it did not enhance, and actually decreased, the value of the land as at the relevant date.

· I am satisfied that the land is free of any improvements which "increases the value of the land" given that H appeared to be cracking in a number of places and subsiding with large pools of water evident which would mean that these structures are exhausted and dilapidated.

· Further the current mesh and pole boundary fencing whilst it may have acted as a security barrier at around the time is now considered to be in a dilapidated state as at the relevant date. Therefore on that basis we do not consider the current fencing is an improvement to the land.

· In the case of any clearing or filling which may have occurred, if any, it is not possible to identify the extent of any such works. Further I am of the view that considerable clearing and levelling works would be necessary for any redevelopment of the land.

Human interventions relevant to your Land

As suggested at paragraph 36 of GSTR 2006/6, the engagement of a professional valuer to establish the issue of whether there are improvements on the land should not be read as an action to conclude the issue. Rather, the engagement of a professional valuer should assist in the objective consideration of the issue of improvements on the land in accordance with the parameters as outlined in GSTR 2006/6 and discussed earlier. The Commissioner is not bound by a professional valuer's assessment of the land. An objective consideration as to whether a human intervention enhances the value of the land should not be limited to valuations by professional valuers, although their assessments may assist in the matter.

Furthermore the starting point, from which to consider the impact and valuation of any human interventions, should be the original state of the Land which was below the surface of the river.

We believe that the human interventions, which may enhance the value of land and which are relevant in relation to your Land are:

· reclamation of land from the river

· filling of the land

· levelling

· H added (to allow for activity)

· mesh and pole boundary fencing

· water connection

· power connection

· onsite temporary sales office ( a portable pod on temporary concrete blocks)

Importantly, and in accordance with paragraph 23 of GSTR 2006/6 discussed earlier, if any of the human interventions enhance the value of the land, then there are improvements on the land (emphasis added). Any human intervention is considered to mean any one human intervention. An independent valuation must include consideration of each and every human intervention, and objectively conclude whether or not any one of those human interventions enhances the land's value. Where each and every human intervention has not been considered then an independent valuation has not followed the guidelines of GSTR 2006/6.

These human interventions are each considered further:

Reclamation of the land from the river

Your valuer has stated "…the subject land remains in its original reclaimed state. " We agree with this opinion. Furthermore we consider that this state of reclamation enhances the value of the land. The reclaimed land has not returned to its natural state as part of the river, it is still in existence and it has not been exhausted nor has it deteriorated. Therefore, reclamation of the Land is a human intervention that enhances the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6. We cannot reasonably and objectively conclude that a reclamation process does not enhance the value of land that was once under the surface of the river. This human intervention, in isolation, is enough to conclude the issue of improvements on the land. We do not believe that an alternative professional valuation or an alternative valuation process will result in a different outcome where the parameters and guidelines in GSTR 2006/6 have been followed.

Filling of the land

From reclamation to its completion the land has been substantially filled. The Land is still in its substantially filled state. The filling does not appear to have been exhausted nor has it substantially deteriorated. Therefore, filling of the Land is a human intervention that enhances the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Levelling

From reclamation the land has been substantially levelled. The Land is still in its substantially levelled state. The levelling does not appear to have been exhausted nor has it substantially deteriorated. Therefore, levelling of the Land is a human intervention that enhances the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

H added (to allow for activity)

Your valuer has stated "The original H was provided to facilitate activities, however, as at our inspection date was dilapidated and not suitable for any purpose. " From the documentation submitted, it is evident that the xx is not totally dilapidated and is able to provide some use as only a small portion appears to have deteriorated to such an extent as to be unusable (the area surrounded by large rocks). Furthermore, L is evident on the Land. Together, the H and L protect most of the Land from weeds and regrowth as well as further soil erosion and degradation. Therefore, the J and K added on the Land is a human intervention that still enhances the value of the land, notwithstanding the small deterioration, in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Mesh and pole boundary fencing

From the detailed photographs submitted, and in particular photographs 8 - 12 , it is evident that the existing mesh and pole boundary fencing is currently in good and usable condition. We note that this fact is at odds with your valuer's assessment. The fencing added on the Land is a human intervention that enhances the value of the land in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Water and power connection

You have stated that the water and power facilities are temporary features that will be removed when the onsite sales office is removed. We consider that the fact that water and power utilities are available to be connected to the Land, notwithstanding their current temporary connection to the land, is a human intervention that enhances the value of the land as described in paragraph 25 of GSTR 2006/6.

Onsite temporary sales office (a portable pod on temporary concrete blocks)

Your valuer has stated "…the sales office…some basic landscaping…are not considered as improvements to the land given that they are not permanent fixtures." We agree that the temporary on site sales office and basic landscaping do not enhance the value of the land and therefore are not improvements.

Conclusion

In accordance with paragraph 23 of GSTR 2006/6 we consider that the following human interventions enhance the value of the land: reclamation of land; filling of the land; levelling of the land; H and L added; mesh and pole fencing added, and water and power utilities available to be connected to the land. Therefore, we conclude that the Land is land on which there are improvements for the purposes of Subdivision 38-N, and in particular section 38-445, of the GST Act.

The supplier is T

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 covering grants of freehold land and similar interests by governments.

Paragraphs 6 and 7 of GSTR 2006/5 discuss the meaning of 'government entity', viz:

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 (ABN Act). 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; 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.

X was created with a commencement date of a date. X falls under paragraph (e) of the meaning of 'government entity' under section 41 of the ABN Act and thus a 'T' under section 195-1 of the GST Act. Therefore, we accept that X, as the supplier, is the T for the purposes of Subdivision 38-N of the GST Act.

The supply is of a freehold interest in land

You confirm that the intended supply of the Land will be of a freehold interest in land. As there is no evidence to the contrary in your submission, we accept that the intended supply of the Land has been, or will be, a freehold interest in the Land, as provided in the Option Agreement between X and Y.

No previous supply

As at 1 July 2000, the Land was held by W. The Land is now owned by you.

A change undertaken by the Commonwealth, a State or a Territory in relation to government organisations (which includes government entities and government related entities), and that involves certain types of restructuring, is known as a Machinery of Government (MOG) change.

Examples of MOG changes include:

· An abolition of a government organisation by transferring its functions to other government departments

· A merger of two or more government organisations

· Movement of functions in to, or out of, government organisations

· A government organisation name change

Where the transfer of functions is due to the operation of an Australian law that operates to transfer any property, assets, rights, debts liabilities or obligations held by the losing agency to the gaining agency, there are no GST consequences if those assets or liabilities are transferred as a result of MOG changes. This is because the losing agency has not taken any action to cause the assets and liabilities to be transferred to the gaining agency (and neither has the gaining agency done anything).

We consider that the transfer of the Land to you (the gaining agency) from Z (the losing agency), and previously to it (as the gaining agency) from W (the losing agency) were due to the operations of State laws and therefore were MOG changes.

The Commissioner accepts that a transfer of assets under MOG changes do not give rise to supplies for GST purposes. Therefore, we agree that the Land has not previously been subject to a supply to which Subdivision 38-N of the GST Act applied.