Edited version of private advice

Authorisation Number: 1012605796212

Ruling

Subject: GST and supply of land

Question

Will the supply of land (the Property) made by you GST-free under paragraph 38-445(1)(a) 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 are a local government area in a state in Australian.

• You are registered for goods and services tax (GST).

• You are created pursuant to the State Local Government Act (LGA).

• The LGA is an Act to provide for a system of local government in the State and for related purposes.

• One of the purposes of the LGA is to provides for a system of local government by

• providing for the constitution of elected local governments in the State; and

• describing the functions of local governments; and

• providing for the conduct of elections and other polls; and

• providing a framework for the administration and financial management of local governments and for the scrutiny of their affairs.

• The LGA deals with the constitutional framework of the system of elected local government in the State maintained as required by the State Constitution Act.

Background.

You own the Property which is comprised a number of lots. You built a facility on the Property before 2000. The facility was either managed by you or by contractors until after 2000 when you resolved to close the facility due to declining income from it, out-dated and deteriorating equipment, declining patronage and environmental problems. The site was not maintained you, buildings fell into disrepair and shrubs, grasses and other native foliage were allowed to grow back and regenerate.

Business plan.

When you closed the facility, you resolved to dispose of the Property. The Property was at that time zoned 'Parks and Recreation' reserve and needed to be rezoned and included in the 'Residential and Stables' zone. You are required to prepare a business plan regarding the disposal of the Property. This business plan contains the following information:

Structures on the Property (photos provided)

• A residential brick building with a tiled roof.

• A café/toilet block with tiled roof. A number of small sheds both brick and timber.

• A number of certain structures

• A number of walls, paths, fences, and gates.

• Numbers of related equipment.

• Drainage infrastructure.

• Panel fencing.

The state of the structures on the Property

• All of the structures on the Property are uninhabitable.

• Soil degradation due to the buildings. Recently you commissioned a Consulting Engineer (CE) to provide advice and indicative development costs for a proposed subdivision on the Property. CE advised that:

• Based on the results of the geotechnical investigation, PCE have recommended that an AS 2870-2011 site classification of class "P" should be adopted for the site at the present. Class P describes sites which include soft soils, loose sands, landslip, mine subsidence, collapsing soils, erosion, fill and abnormal moisture conditions. For the subdivision, this classification stems from the presence of existing structures, several abandoned underground service trenches, organic soils at several test locations and possibly elsewhere on the site.

• Once the site is cleared of all building rubble, structures and known drainage pipes, CE have recommended that the site be raked to a minimum depth of 1.0 m to remove any buried cables and conduits. The indicative development costs include an allowance for undertaking these works and the subsequent removal and disposal of an estimated quantity of redundant material.

• Asbestos cement material has been identified under the roof of one of the structures.

• Fencing around the Property is a combination of some cyclone security fencing and some other type of fencing. The fencing does not extend to enclose the whole of the Property and some of the fencing is broken.

• Vegetation on the Property comprises of medium to large trees, shrubs and grasses.

• The buried cables and pipes are a hindrance to any use of the Property

Expert's opinion

You engaged an expert valuer ABC to give an opinion as to whether the value of the Property 'as is' is less than the value of the property in its natural state. The ABC report concluded that the value of the Property in its current state is at least $XXXXX less than the value of the Property in its natural state.

The ABC report provides that in order for the land to return to its natural state, the derelict buildings and infrastructure would need to be removed and the soil remediated".

You specifically requested that:

This private ruling application is based on the assumption that you do not remove any redundant infrastructure or clear out any vegetation and that the land remains in the state that it was at the report time. Within that business plan are various photographs of the Property and it is requested that the ATO rule on the basis that when the settlement of the sale of the Property occurs sometime in the future the presentation and landscape of the Property does not change from the state of the Property as at the report time.

Relevant legislative provisions

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

Section 9-5

Section 38-445

Reasons for decision

Question 1

Summary

The existence of the structures on the Property and their state is not considered improvement on the Property. Subsection 38-445(1) of the GST Act applies to make the supply of the Property GST-free.

Detailed reasoning

Goods and services tax ruling GSTR 2006/5 discusses the meaning of 'Commonwealth, a State or a Territory.' Our view in GSTR 2006/5 is that the legislation constituting a particular local government must be considered to determine whether a local government is the State for the purposes of the GST Act.

You are created pursuant to the State Local Government Act (LGA). The LGA is an Act to provide for a system of local government in the State and for related purposes.

One of the purposes of the LGA is to provides for a system of local government by

• providing for the constitution of elected local governments in the State; and

• describing the functions of local governments; and

• providing for the conduct of elections and other polls; and

• providing a framework for the administration and financial management of local governments and for the scrutiny of their affairs.

The LGA deals with the constitutional framework of the system of elected local government in the State maintained as required by the State Constitution Act.

The State Constitution Act, the LGA create the legal framework within which local governments operate in the State.

Under these circumstances, you, a local government body is established under and regulated by the LGA. Therefore, we consider that you are the 'State' for the purposes of subsection 38-445 of the GST Act.

Under paragraph 38-445(1)(a) of the GST Act, a supply by the Commonwealth, a State or a Territory of a freehold interest in land on which there are no improvements is GST-free.

You are the State for the purposes of Subdivision 38-N of the GST Act as discussed above and has held the land since before 1 July 2000.

The meaning of unimproved land

Goods and Services Tax Ruling GSTR 2006/6 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 and explains the Commissioners view of the law as it applied from 1 July 2000.

Paragraph 20 of GSTR 2006/6 states that unimproved land is land in its natural state, therefore, to determine whether there are improvements on the land for the purposes of paragraph 38-445(1)(a) of the GST Act, the land must be compared with the land in its natural state.

Paragraph 22 of GSTR 2006/6 provides that for there to be improvements on the land, the following factors must present:

• 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

In your circumstances:

Human intervention

As you have put structures on the Property which was used as theparticular facility, we consider that there are human interventions on the Property.

The human intervention must have been physically located on the land

The Commissioner considers that improvements on the land, in the GST context, are not limited to visible structural improvements and includes improvements below the surface of the land such as underground drainage and other facilities. The structures in the Property include both above and underground.

Human intervention must enhance the value of the land at the relevant date

Paragraph 23 of GSTR 2006/6 provides where there have been 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. The relevant date is the date the supply will be made. This requires the land on the date of supply is compared to the land in its natural state.

Paragraph 26 of GSTR 2006/6 states:

A human intervention is not necessarily an improvement. To be an improvement, the human intervention must enhance the value of the land.

Paragraphs 28 and 29 of GSTR 2006/6 explain further:

28. In other circumstances, human interventions that were once improvements but that have deteriorated overtime or have contributed to land degradation may no longer enhance the value of the land and are not improvements. For example, clearing is a human intervention which ordinarily enhances the value of the land. However, clearing may deteriorate overtime with the regrowth of the same type of vegetation or even different vegetation (for example lantana, blackberry or other noxious weeds). Clearing also may degrade the land by later causing erosion or salinity problems.

29. Similarly, a building that initially enhanced the value of the land may have deteriorated over time to such an extent that it is a detriment as it is uninhabitable and has been condemned by order of the local council is not considered to be an improvement.

In your circumstances, all of the structures above and underground in the Property are uninhabitable, other structures are in a state of disrepair.

Based on the results of the geotechnical investigation, CE has recommended that an AS 2870-2011 site classification of class "P" should be adopted for the site at the present. Class P describes sites which include soft soils, loose sands, landslip, mine subsidence, collapsing soils, erosion, fill and abnormal moisture conditions. For the Property, this classification stems from the presence of existing structures, several abandoned underground service trenches, organic soils at several test locations and possibly elsewhere on the site.

Once the site is cleared of all building rubble, structures and known drainage pipes, CE have recommended that the site be raked to a minimum depth of 1.0 m to remove any buried cables and conduits. The indicative development costs include an allowance for undertaking these works and the subsequent removal and disposal of an estimated quantity of redundant material.

The valuation made by ABC valuer also determines that the value of the property in its current state is at least $XXXXX less than the value if the Property were in its natural state. In order for the land to return to its natural state, the derelict buildings and infrastructure would need to be removed and the soil remediated.

Based on this information, we consider that at the time of the report, the 'allowance' for undertaking the remedial works to the Property is 'at least $XXXX as determined by ABC.

You have specifically requested that the ATO rules on the basis that when the settlement of the sale of the Property occurs sometime in the future the presentation and landscape of the property does not change from the state of the Property at the time of the report.

In the circumstances of the Property, we consider that there is no improvement to the land as at the time of the report

Under paragraph 38-445(1)(a) of the GST Act, the supply of the Property at some future time (the date of the supply of the land where the state of the Property remains the same as it was at the time of the report will be GST-free.