Edited version of your written advice

Authorisation Number: 1012697839902

Ruling

Subject: GST and the Margin Scheme

Question 1

Are you entitled to a refund of overpaid GST to the amount of $ related to sales of real estate under the margin scheme where the GST payable was previously miscalculated and where sales were completed during the particular period?

Answer

No. However, you may be entitled to a refund of GST of a lower amount. As you have not submitted an approved valuation we cannot consider the amount of GST refund that you may be entitled to at this stage.

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 an entity that owns substantial parcels of land, much of which you have owned since before 1 July 2000.

You owned parcels of land which were subdivided and portions sold off since 1 July 2000 including the particular period.

You contend that these subdivided lots were unimproved at 1 July 2000 and are collectively referred to herein as the 'Ruling Properties'. A detailed description of the lots comprising the Ruling Properties is attached to your application for a private ruling and is marked as Annexure A.

The sales of the subject parcels of land have been pursuant to contracts for the sale of land. Each of the contracts contains a clause dealing with GST which provides that "The Vendor will not apply the Margin Scheme to the Supply of the Property made under this Contract of Sale.".

You attached to your application for a private ruling, and marked as Annexure B, a copy of the contract for a Lot which is submitted as a sample contract and is representative of all of the contracts relating to the Ruling Properties.

You inform us that:

• The price at which the Ruling Properties were sold was the market value determined by you as the price that a willing but not anxious vendor and purchaser would enter an agreement to transfer the land.

• You set the price without taking into consideration any GST that may be payable on the sale of each parcel of land.

• You operated in a free market and sold the land at the going market rate.

• In arriving at the price at which lots of land was advertised, you did not start with a particular price and then added GST to the prices obtained for the sale of each property.

• The GST paid by you on each parcel of land is a cost absorbed by you in the same way that costs of undertaking subdivision work including the construction of roads, drainage, sewage and other infrastructure.

You believe that none of the purchasers of the Ruling Properties were registered or required to be registered for GST

You have kept records of the land sales made in the relevant period covered by this ruling application.

You attached to the application for a private ruling, a table of the land sales made in the relevant period which describe the particulars of the Properties sold.

You submit that Business Activity Statements (BAS) lodged by you for the period representing the period during which the Ruling Properties were sold, you reported the full amount of GST being 1/11 of the sale price of each of the properties.

You attached to the application for a private ruling an aerial photograph which shows the en globo parcel of land that was subdivided into the Ruling Properties at issue in this application.

You contend that at 1 July 2000, these parcels were all unimproved and in their natural state being devoid of built structures and comprised of predominantly flat land with native grasses, shrubs and trees. The southeast corner of the en globo land shows improvements upon that section of the land but that portion is not part of any of the Ruling Properties

You sought extensions of time to obtain agreements with the purchasers that the margin scheme is to apply to the sales of the Ruling Properties, and these extensions were granted.

You subsequently obtained and attached to your application, copies of agreements executed by the parties evidencing their intention to apply the margin scheme to the sales of the Ruling Properties

You submit that you should have applied item 4 of the table in subsection 75-10(3) of the GST Act in calculating the GST instead of paying 1/11^th of the sale price of each of the properties.

You sought an extension of time to obtain valuations which we granted. Subsequently, you submitted a valuation for the Ruling Properties.

Notification and amount of refund

You notified the Commissioner in accordance with subsection 105-55 of the Taxation Administration Act 1953 of your entitlement to a refund.

Relevant legislative provisions

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

Reasons for decision

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

Summary

We have concluded that the Ruling Properties is land on which there are improvements as at 1 July 2000 for the purposes of Division 75, therefore , Item 3 of the table in paragraph 75-10(3)(a) applies. Consequently, the appropriate valuation date is as at 1 July 2000.

The professional valuation that you have supplied in relation to the Ruling Properties does not comply with the requirements of the relevant margin scheme determinations. Therefore, we cannot consider the amount of GST refund that you may be entitled to.

Detailed Reasoning

The Commissioner accepts that item 4 of the table in subsection 75-10(3) can apply, where relevant.

The Commissioner has provided clarification on the meaning of the phrase "land on which there are no improvements" in Goods and Services Tax Ruling GSTR 2006/6 Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75 (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. The premise of the Commissioner's view 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.

In relation to any improvements on the land from the land's natural 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 one of the human interventions enhances 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.

Paragraph 25 of the ruling provides a list of examples of human interventions 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.

The photographs you supplied shows that the land has been extensively cleared. The land looks as if it has been used as farmland since prior to 1 July 2000 which means it has been cleared of natural timber, scrub or other vegetation and may have had other interventions as indicated above. The mere intervention of clearing, of its own, enhances the value of the land. Where this clearing has not been exhausted and where the parcels of land supplied have not returned to their natural state prior to their supply, the parcels of land so supplied are also considered to be improved land. We conclude that it is highly unlikely that the improvement of clearing has been exhausted or that the land has returned to its natural state before you sold any of the Ruling Properties.

Consequently, we therefore conclude that the Ruling Properties is land on which there are improvements as at 1 July 2000 for the purposes of Division 75.

As we have concluded that the Ruling Properties is land on which there are improvements as at 1 July 2000 for the purposes of Division 75, item 3 of the table in paragraph 75-10(3)(a) applies. The appropriate valuation date therefore is as at 1 July 2000.

Professional Valuation

The professional valuation that you have supplied in relation to the Ruling Properties does not comply with the requirements of neither A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3 (MSV 2005/3) nor A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 (MSV 2009/1) as the case may be.

Paragraphs 5 & 6 of MSV 2005/3 describe the thing that is supplied:

What is the freehold interest, stratum unit or long-term lease that you value?

5. If the real property supplied is the same interest, unit or lease that existed at the valuation date, the valuation must be of that interest, unit or lease.

6. If the real property that is supplied is not the same interest, unit or lease that existed at the valuation date, but was derived from an interest, unit or lease that was in existence at that date, the valuation must be made as follows:

(a) a valuation of the interest, unit or lease in existence at the valuation date must be made; and

(b) the valuation of that interest, unit or lease must be apportioned on a fair and reasonable basis, to ascertain the part of the valuation that relates to the interest, unit or lease that you supply.

The land, in existence at the valuation date and from which the allotments have been subdivided, needs to be particularly described and valued accordingly, and the valuation of the allotments supplied by you apportioned on a fair and reasonable basis. The land and the allotments supplied by you have not been appropriately valued as required.

Similarly, paragraphs 8 & 9 of MSV 2009/1 describe the thing that is supplied:

What is the freehold interest in land, stratum unit or long-term lease that you value?

8. If the real property that you supply by selling a freehold interest in land or selling a stratum unit or granting or selling a long-term lease is the same interest, unit or lease that existed at the valuation date, the valuation must be of that interest, unit or lease.

9. If the real property that you supply is not the same interest, unit or lease that existed at the valuation date, but was derived from an interest, unit or lease that was in existence at that date, the valuation must be made as follows:

(1) a valuation of the interest, unit or lease in existence at the valuation date must be made; and

(2) the valuation of that interest, unit or lease must be apportioned on a fair and reasonable basis, to ascertain the part of the valuation that relates to the interest, unit or lease that you supply.

Method 1 of each of the above determinations describes the requirement for a professional valuation. Paragraphs 9 - 11 of MSV 2005/3 describe the requirements of a professional valuation. Method 1 of MSV 2005/3 states:

Method 1:

9. A written valuation by a professional valuer determining the market value of the interest, unit or lease at the valuation date. The valuation must be made in a manner that is not contrary to the professional standards recognised in Australia for the making of real property valuations.

10. The valuation must include a signed certificate which specifies:

(a) a full description of the property being valued;

(b) the applicable valuation date;

(c) the date the valuer provides the valuation to the supplier;

(d) the market value of the property at the valuation date;

(e) the valuation approach and the valuation calculation; and

(f) the qualifications of the valuer.

11. However, if:

(a) the interest, unit or lease has been supplied by the Commonwealth, a State or a Territory; and

(b) the supplier has held the interest, unit or lease since before 1 July 2000; and

(c) there were no improvements on the land or premises in question as at 1 July 2000; and

(d) there are improvements on the land or premises in question on the day on which the taxable supply takes place,

the valuation must be a valuation, made in writing by a professional valuer determining the market value of the interest, unit or lease, that is not contrary to professional standards recognised in Australia for the making of real property valuations, as if no improvements had been made at the date of the supply.

Paragraph 13 of MSV 2009/1 states:

Method 1: valuation by a *professional valuer

13. For a valuation by a valuer to be an approved valuation for the purposes of Division 75 that valuation must be made in accordance with the following requirements:

(1) the valuer must be a *professional valuer;

(2) the valuation must be in writing;

(3) the valuation must determine the market value of the interest, unit or lease at the valuation date;

(4) the valuation must be made in a manner that is not contrary to the professional standards recognised in Australia for the making of real property valuations;

(5) the valuation must include a signed certificate which specifies:

(a) a full description of the property being valued;

(b) the applicable valuation date;

(c) the date the valuer provides the valuation to the supplier;

(d) the market value of the property at the valuation date;

(e) the valuation approach and the valuation calculation; and

(f) the name and qualifications of the valuer,

(6) if the interest, unit or lease has been supplied by the Commonwealth, a State or a Territory; and

(a) the supplier has held the interest, unit or lease since before 1 July 2000;

(b) there were no improvements on the land or premises in question as at 1 July 2000; and

(c) there are improvements on the land or premises in question on the day on which the taxable supply takes place,

the valuation must be made as if no improvements had been made at the date of the taxable supply; and

…

The valuation you submitted does not contain all of the requirements for an approved valuation in accordance with MSV 2005/3 and 2009/1 as the case may be. Therefore it is not an approved valuation under subsection 75-35(2).

As the professional valuation is not an approved valuation for the purposes of Division 75, there is no appropriate refund amount that you have sought to claim. Therefore, we cannot consider the amount of GST refund that you may be entitled to.