Edited version of your private ruling

Authorisation Number: 1012546241810

Ruling

Subject: GST and unimproved land

Question 1

Is the area that comprised the former land that is being developed for sale considered by the Commissioner to be "unimproved land" as at 1 July 2000 for the purposes of item 4 of the table in subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The former land is considered to be land on which there were improvements as at 1 July 2000.

Question 2

If the answer to question 1 is affirmative, are you entitled to use an approved valuation of the land on the day on which the taxable supply takes place, in accordance with item 4 of the table in subsection 75-10(3) of the GST Act, in calculating GST payable under the margin scheme?

Answer

As the answer to Question 1 is negative, Question 2 is no longer applicable.

Relevant facts and circumstances

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

o The former sports ground is part of the development.

o Broadly, the development involves the construction of a harbour, adjacent to the existing township.

o A mixed use precinct and medium density housing is planned to be developed in the harbour.

o The remainder of the development consists of multiple stages of residential land subdivision.

o You intend to agree with the purchaser to apply the margin scheme on lots sold on the former land.

o The development is represented in a series of appendices:

§ Appendix 1 - original title ownership

§ Appendix 2- ownership at 1 July 200X

§ Appendix 3-Aerial photo at month 200X

§ Appendix 4-Aerial photo date month 19XX

§ Appendix 5 - site plan with the former land superimposed

§ Appendix 6- Interim Plans of the harbour

§ Appendix 7-Valuation report provided

o The former sports ground was operated by the club. It consisted of a house, shop, shed, grassed areas and trees.

o The club moved from the former land to new land after 2000.

o The land in question was used as an operating activity until the move to the new land after 2000.

o This private ruling application only applies in respect of the former land as at 1 July 2000. It does not apply to the area that comprised the former house, shop, car park or shed.

o This private ruling application also does not apply to any part of the area of the former sports ground that has already been developed and where sales have been completed in the past.

o Prior to becoming an activity, early European settlers grazed livestock on the land. Indigenous Australians are also understood to have employed land management practices in the area.

o A number of stages of the development are being developed on the former land and are proposed to be completed as sales in the future. These include:

• Stage X - due to settle later this year

• Part of Stage Y-due to settle later this year

• Part of Stage Z - the planning for Stage Y is currently incomplete.

• Part of the harbour - this entire precinct is envisaged to yield a number of marina berths and residential housing of varying densities.

• Only part of the harbour is on the former land.

o Individual allotments, within each stage of development, will be sold

o A valuation report on the land in question stated:

'The land had site improvements including grassed areas, but these have no value and are not considered as improvements of a structural nature.'

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(3)

Reasons for decision

The ATO view on improvements on land is explained in GSTR 2006/6.

This ruling explains that unimproved land is taken to be land in its natural state. To establish whether there are improvements on the land the land is compared with land in its natural state (paragraph 20 GSTR 2006/6).

GSTR 2006/6 also 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 of the GST Act.

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.

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.

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 Item 4 of the table in subsection 75-10(3) of the GST Act, the relevant day for ascertaining whether there are improvement on the land is 1 July 2000.

In addition, 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.

Paragraphs 48 to 51 under the sub-heading of Subdivided land and item 4 of the table in subsection 75-10(3) of GSTR 2006/6 also state:

48. In this part of the Ruling, the Commissioner considers whether a supply of a particular subdivided lot is ineligible for consideration under item 4 of subsection 75-10(3) because the larger area (englobo land) from which it was subdivided had improvements on it at 1 July 2000, even though the physical area of the particular subdivided lot had no improvements.

49. The issue is whether it is necessary to consider whether any part of the englobo land had improvements on it or whether regard should be had only to that part of the englobo land that forms the subdivided lot.

50. 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.

51. These words can be contrasted with the expression 'interest, unit or lease' which are used elsewhere in the item to refer to the legal interest being supplied under the margin scheme. This distinction supports the view that it is the physical land rather than the legal interest that is considered when determining whether there were improvements on the land at the relevant date.6

Therefore in your case we need to consider the individual allotments that will be developed and sold within Stage X, part of Stage Y, part of Stage Z and part of the harbour as opposed to the 'whole of the former land'.

Paragraph 25 of GSTR 2006/6 provides examples of human interventions that 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 provided a valuation report that states the following conclusion:

'As at July, 2000 it is my opinion that the defined land within the project, known as the former land, shown shaded yellow on the attached plan, was "land on which there are no improvements", which provides that the land is unimproved land for the purpose of the GST Act The land had site improvements including grassed areas but these have no value and are not considered as improvements of a structural nature.'

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 37 of GSTR 2006/6 discusses the meaning of 'on the land' and that any improvements should not be limited to structural ones:

Meaning of 'on the land'

37. The term 'improvements on the land' refers to any human intervention on the land which has the effect of enhancing its value. It is not limited to visible structural improvements and includes improvements below the surface of the land, such as underground drainage or other facilities.

The land in question constituted an operating activity as at 1 July 2000. The valuer accepted that the land had site improvements including grassed areas but added that these improvements have no value as they are not structural. This is at odds with paragraph 37 of GSTR 2006/6.

Human interventions relevant to the former sports ground 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 may 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.

Furthermore the starting point, from which to consider the impact and valuation of any human interventions, should be the original state of the former land.

We believe that the human interventions, which may enhance the value of land and which are relevant in relation to the former land as at 1 July 2000 are:

· 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

These human interventions, in relation to the individual allotments that will be the subject of the supply within Stage X, part of Stage Y, part of Stage Z and part of the harbour, are each considered further as at 1 July 2000:

Fencing internal or boundary fencing

From the detailed photographs submitted as Appendices 3 & 4, boundary fencing may have existed and formed part of and applied to the whole of the former land and not necessarily aligned with any particular individual allotments to be developed. Therefore we consider that the individual allotments will not have the benefit of this boundary fencing. The fencing added on the land is a human intervention as at 1 July 2000 that does not enhance the value of the individual allotments to be developed and sold and therefore is not considered to be an improvement.

Utilities, for example, water, electricity, gas, sewerage connected or available for connection

From the information submitted, water appears to be the only utility connected to the former land as at 1 July 2000 in order to irrigate the grassed areas and trees. This irrigation is available to the whole of the land not necessarily aligned with any particular individual allotments. However water is available for connection to each stage as each stage is developed and therefore available for connection to each individual allotment as each allotment is developed. The availability of this irrigation is a human intervention as at 1 July 2000 that enhances the value of each individual allotment to be developed and sold, and therefore is an improvement that enhances the value of the land as at 1 July 2000 in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Clearing of timber, scrub or other vegetation

You have stated that the former land was an activity operated by the club. It consisted of a house, shop, shed, grassed areas and trees. The house, shop and shed are not part of the ruling request. Prior to becoming an activity, early European settlers grazed livestock on the land. This activity was operational until 2004 when the new activity began operating. Therefore the land in question was operating as an activity as at 1 July 2000.

From your description of the former land, photographs submitted and the fact that it was used as an activity as at 1 July 2000, it is evident that clearing of timber, scrub or native vegetation occurred prior to 1 July 2000 but was still in place as at 1 July 2000. This clearing has been maintained and the land has not reverted back to its original or virgin state. This human intervention of clearing of timber, scrub or native vegetation enhances each individual allotment to be developed within Stage X, part of Stage Y, part of Stage Z and part of the boat harbour as it relieves another person from the burden of undertaking the activity. Therefore we conclude that the human intervention of clearing of timber, scrub or native vegetation present as at 1 July 2000 enhances the value of each individual allotment to be developed and sold, and therefore is an improvement that enhances the value of the land as at 1 July 2000 in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Furthermore, the professional valuer's report concludes that "The land had site improvements but these have no value and are not considered as improvements of a structural nature." In accordance with paragraph 23 of GSTR 2006/6 and discussed earlier, any human intervention that enhances the value of the land, regardless of whether the net value of the human interventions enhances the overall value of the land, is still considered to be an improvement.

Excavation, grading or levelling of land

From the information submitted, grading and, or levelling of the land has also occurred, and was still present as at 1 July 2000, as the former land was operating as an activity as at 1 July 2000. Prior to this it was developed into grazing land by early settlers. This human intervention applied to the whole of the land and equally applies to the individual allotments to be developed within Stage X, part of Stage Y, part of Stage Z and part of the boat harbour. This grading and levelling has been maintained, was still present as at 1 July 2000 and the land has not reverted back to its original or virgin state. This human intervention enhances the value of each individual allotment to be developed and sold, and therefore is an improvement that enhances the value of the land as at 1 July 2000 in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Removal of rocks, stones or soil

In association with the clearing of timber, scrub or native vegetation and grading and or levelling of the land, removal of rocks, stones or soil may have also occurred on the land prior to, and may have also been undertaken in the creation of the former land. This human intervention of removing rocks, stones or soil applied to the whole of the land and was still present as at 1 July 2000 and equally applies to the individual allotments to be developed within Stage X, part of Stage Y, part of Stage Z and part of the harbour. The removal of rocks, stones or soil has enhanced the value of the whole of the land as at 1 July 2000, and enhances the value of each individual allotment to be developed and sold, and therefore is an improvement that enhances the value of the land as at 1 July 2000 in accordance with paragraphs 22 and 23 of GSTR 2006/6.

Conclusion - Improvements on the land

In accordance with paragraph 23 of GSTR 2006/6 we consider that the following human interventions enhance the value of the individual allotments to be developed and sold on the former land: the availability of water for connection to the individual allotments; the clearing of timber, scrub or native vegetation; grading and, or levelling; removal of rocks, stones or soil. Therefore, we conclude that the individual allotments to be developed and sold on the former land within Stage X, part of Stage Y, part of Stage Z and part of the harbour is land on which there are improvements as at 1 July 2000 in relation to item 4 of the table in subsection 75-10(3) of the GST Act.

The supplier is the State

The Commissioner has previously advised that you are the State for the purposes of the GST Act and specifically in relation to item 4 of the table in subsection 75-10(3) of the GST Act. As there is no evidence that your circumstances have changed such that you are no longer the State, we accept that you are the State.

Held the interest since before 1 July 2000

From the information provided, you have held the interest in the former land since before 1 July 2000, and still hold this land. We accept that you have held the interest in the former land since before 1 July 2000.