Edited version of private advice

Authorisation Number: 1012649976965

Ruling

Subject: GST and supply of land by a local government

Question

Will your supply of the Property be GST-free under paragraph 38-445(1)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

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 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 Playground on the Property before 2000. The Playground was either managed by you or by contractors until after 2000 when you resolved to close the Playground due to declining income from it, out-dated and deteriorating facilities, 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 Playground, 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 concrete and tiled pools.

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

• A number of tanks and pumps.

• Drainage infrastructure.

• Panel fencing.

You have provided a number of aerial photos of the Property.

The state of the structures on the Property

• All of the buildings on the Property are uninhabitable.

• Recently you commissioned a Consulting Engineer (CE) to provide advice and indicative development costs for a proposed subdivision on the Property. CE advised that amongst other things there was considerable soil degradation due to the buildings:

• 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.

• You contended that the buried cables and pipes are a hindrance to any use of the Property

Expert's opinion

The City 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 requests 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 Property is considered not to be unimproved. Paragraph 38-445(1)(a) of the GST Act does not apply 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.

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.

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

THE PROPERTY

Human intervention

As you have put structures on the Playground, we consider that there are human interventions on the Property.

The human intervention must have been physically located on the land

For GST purposes, we consider that improvements on the land are not limited to visible structural improvements and include improvements below the surface of the land such as underground drainage and other facilities. The structures on the Property are both above and underground.

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

While these are not all of the possible human interactions that may be present on the land, being guided by paragraph 25 of GSTR 2006/6, it is only necessary that one of these human interactions enhances the value of the land as at the time of the supply, being an improvement on the land, when compared to its natural state. It is irrelevant if the overall value of the land is not enhanced.

This is explained in paragraphs 23, 32 and 33 of GSTR 2006/6, which state:

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.

…

32. Where there are a number of human interventions on the land, it is not appropriate to take a holistic approach to establishing whether there are improvements on the land. Instead, it is necessary to determine whether any of the human interventions enhance the value of the land. If any of the human interventions enhance the value of the land there are improvements on the land.

33. For example, a building that is uninhabitable because it is derelict and condemned by order of the local council does not enhance the value of the land. The building in these circumstances is a detriment rather than an improvement. However, if the land on which the building is located is cleared and the clearing has not deteriorated or has not degraded the land, there are improvements on the land. The clearing still enhances the value of the land.

Under paragraph 23 of GSTR 2006/6 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 to be compared to the land in its natural state.

In your circumstances, the buildings on the Property are uninhabitable. The buildings are not the only improvements. The photos in the business plan show that the existence of walls, paths, fences and gates constitute improvements.

The pumps, piping, pump sheds are improvements although those improvements are not allowed to be currently used.

Photos in the business plan indicate that the natural vegetation around the trees has been replaced with grasses which have been maintained.

You have contended that:

• the ABC report 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, PCE have recommended that the site be raked to a minimum depth of X 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 determines that the value of the property in its current state is at least $xxxxxxxx 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.

However, the term 'any' in paragraph 23 of GSTR 2006/6 means that if there is one human intervention that constitutes an improvement on the land, albeit there are a number of human interventions which are to the detriment to the land, the land is NOT unimproved. This is why establishing a net dollar position on all of the human interventions does not assist in establishing whether the land is or is not unimproved

The value of the land, as at the relevant date, may be reduced as a result of contamination and other human interventions. However, it has not reduced the value of other enhancements as discussed above, namely the clearing, walls, paths, fences and gates and the fencing, which were in existence at the relevant date.

Under these circumstances of the Property, we consider that there were improvements on the land which enhance the land. It is therefore irrelevant that there were also human interventions which were to the detriment to the land.

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 report time.

Therefore, the supply of the Property at some future time at which the state of the Property will remain the same as it was at the report time not be GST-free under paragraph 38-445(1)(a) of the GST Act.